The recent earnings posted by COSCO SHIPPING Technology Co., Ltd. (SZSE:002401) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

Zooming In On COSCO SHIPPING Technology's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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.

COSCO SHIPPING Technology has an accrual ratio of 1.07 for the year to March 2024. Ergo, its free cash flow is significantly weaker than its profit. Statistically speaking, that's a real negative for future earnings. Indeed, in the last twelve months it reported free cash flow of CN¥98m, which is significantly less than its profit of CN¥190.5m. At this point we should mention that COSCO SHIPPING Technology did manage to increase its free cash flow in the last twelve months

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of COSCO SHIPPING Technology.

Our Take On COSCO SHIPPING Technology's Profit Performance

As we discussed above, we think COSCO SHIPPING Technology's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that COSCO SHIPPING Technology's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 23% per annum growth in EPS for the last three. 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 COSCO SHIPPING Technology as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 2 warning signs for COSCO SHIPPING Technology (of which 1 is significant!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of COSCO SHIPPING Technology's profit. 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.