Advanced Micro-Fabrication Equipment Inc. China's (SHSE:688012) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Zooming In On Advanced Micro-Fabrication Equipment China'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Advanced Micro-Fabrication Equipment China has an accrual ratio of 0.55 for the year to December 2023. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of CN¥2.2b, in contrast to the aforementioned profit of CN¥1.79b. We also note that Advanced Micro-Fabrication Equipment China's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥2.2b.

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.

Our Take On Advanced Micro-Fabrication Equipment China's Profit Performance

As we have made quite clear, we're a bit worried that Advanced Micro-Fabrication Equipment China didn't back up the last year's profit with free cashflow. For this reason, we think that Advanced Micro-Fabrication Equipment China's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Advanced Micro-Fabrication Equipment China as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 1 warning sign for Advanced Micro-Fabrication Equipment China you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Advanced Micro-Fabrication Equipment China'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.