Despite posting some strong earnings, the market for SMO ClinPlus CO.,LTD.'s (SZSE:301257) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

Examining Cashflow Against SMO ClinPlusLTD's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to March 2024, SMO ClinPlusLTD recorded an accrual ratio of 0.33. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. In fact, it had free cash flow of CN¥76m in the last year, which was a lot less than its statutory profit of CN¥132.1m. SMO ClinPlusLTD shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of SMO ClinPlusLTD.

Our Take On SMO ClinPlusLTD's Profit Performance

As we have made quite clear, we're a bit worried that SMO ClinPlusLTD didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that SMO ClinPlusLTD's underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about SMO ClinPlusLTD as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 1 warning sign with SMO ClinPlusLTD, and understanding this should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of SMO ClinPlusLTD's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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.