A lackluster earnings announcement from Fujian Supertch Advanced Material CO.,Ltd. (SHSE:688398) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.

A Closer Look At Fujian Supertch Advanced MaterialLtd'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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, Fujian Supertch Advanced MaterialLtd had an accrual ratio of 0.34. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Even though it reported a profit of CN¥92.0m, a look at free cash flow indicates it actually burnt through CN¥271m in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥271m, this year, indicates high risk.

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 Fujian Supertch Advanced MaterialLtd's Profit Performance

As we have made quite clear, we're a bit worried that Fujian Supertch Advanced MaterialLtd didn't back up the last year's profit with free cashflow. For this reason, we think that Fujian Supertch Advanced MaterialLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. In further bad news, its earnings per share decreased in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Fujian Supertch Advanced MaterialLtd, you'd also look into what risks it is currently facing. Case in point: We've spotted 2 warning signs for Fujian Supertch Advanced MaterialLtd you should be mindful of and 1 of them shouldn't be ignored.

This note has only looked at a single factor that sheds light on the nature of Fujian Supertch Advanced MaterialLtd's profit. But there are plenty of other ways to inform your opinion of a company. 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 with high insider ownership.

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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.