Guangdong Silver Age Sci & Tech Co.,Ltd. (SZSE:300221) just reported healthy earnings but the stock price didn't move much. Our analysis suggests that investors might be missing some promising details.

Zooming In On Guangdong Silver Age Sci & TechLtd'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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2024, Guangdong Silver Age Sci & TechLtd had an accrual ratio of 0.21. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of CN¥261m, in contrast to the aforementioned profit of CN¥39.5m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥261m, this year, indicates high risk. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guangdong Silver Age Sci & TechLtd.

The Impact Of Unusual Items On Profit

Unfortunately (in the short term) Guangdong Silver Age Sci & TechLtd saw its profit reduced by unusual items worth CN¥28m. In the case where this was a non-cash charge it would have made it easier to have high cash conversion, so it's surprising that the accrual ratio tells a different story. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Guangdong Silver Age Sci & TechLtd to produce a higher profit next year, all else being equal.

Our Take On Guangdong Silver Age Sci & TechLtd's Profit Performance

In conclusion, Guangdong Silver Age Sci & TechLtd's accrual ratio suggests that its statutory earnings are not backed by cash flow, even though unusual items weighed on profit. Based on these factors, we think that Guangdong Silver Age Sci & TechLtd's profits are a reasonably conservative guide to its underlying profitability. If you want to do dive deeper into Guangdong Silver Age Sci & TechLtd, you'd also look into what risks it is currently facing. Case in point: We've spotted 1 warning sign for Guangdong Silver Age Sci & TechLtd you should be aware of.

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 is always more to discover if you are capable of focussing your mind on minutiae. 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 with significant insider holdings 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.