We Like Shenzhen Sinovatio Technology's (SZSE:002912) Earnings For More Than Just Statutory Profit

Despite posting healthy earnings, Shenzhen Sinovatio Technology Co., Ltd.'s (SZSE:002912 ) stock has been quite weak. We have done some analysis, and found some encouraging factors that we believe the shareholders should consider.

See our latest analysis for Shenzhen Sinovatio Technology

A Closer Look At Shenzhen Sinovatio Technology's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to March 2024, Shenzhen Sinovatio Technology recorded an accrual ratio of -0.25. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of CN¥178m during the period, dwarfing its reported profit of CN¥17.0m. Notably, Shenzhen Sinovatio Technology had negative free cash flow last year, so the CN¥178m it produced this year was a welcome improvement. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

The Impact Of Unusual Items On Profit

Surprisingly, given Shenzhen Sinovatio Technology's accrual ratio implied strong cash conversion, its paper profit was actually boosted by CN¥34m in unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. We can see that Shenzhen Sinovatio Technology's positive unusual items were quite significant relative to its profit in the year to March 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Shenzhen Sinovatio Technology's Profit Performance

In conclusion, Shenzhen Sinovatio Technology's accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Given the contrasting considerations, we don't have a strong view as to whether Shenzhen Sinovatio Technology's profits are an apt reflection of its underlying potential for profit. If you want to do dive deeper into Shenzhen Sinovatio Technology, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 2 warning signs for Shenzhen Sinovatio Technology and you'll want to know about these.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.