When companies post strong earnings, the stock generally performs well, just like Shanghai DOBE Cultural & Creative Industry Development (Group)Co. LTD.'s (SZSE:300947) stock has recently. We have done some analysis, and we found several positive factors beyond the profit numbers.

Zooming In On Shanghai DOBE Cultural & Creative Industry Development (Group)Co's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. 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 March 2024, Shanghai DOBE Cultural & Creative Industry Development (Group)Co had an accrual ratio of -0.79. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥816m, well over the CN¥39.6m it reported in profit. Shanghai DOBE Cultural & Creative Industry Development (Group)Co shareholders are no doubt pleased that free cash flow improved over the last twelve months. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shanghai DOBE Cultural & Creative Industry Development (Group)Co.

The Impact Of Unusual Items On Profit

While the accrual ratio might bode well, we also note that Shanghai DOBE Cultural & Creative Industry Development (Group)Co's profit was boosted by unusual items worth CN¥36m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Shanghai DOBE Cultural & Creative Industry Development (Group)Co doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Shanghai DOBE Cultural & Creative Industry Development (Group)Co's Profit Performance

In conclusion, Shanghai DOBE Cultural & Creative Industry Development (Group)Co's accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Based on these factors, we think that Shanghai DOBE Cultural & Creative Industry Development (Group)Co's profits are a reasonably conservative guide to its underlying profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To that end, you should learn about the 3 warning signs we've spotted with Shanghai DOBE Cultural & Creative Industry Development (Group)Co (including 2 which shouldn't be ignored).

Our examination of Shanghai DOBE Cultural & Creative Industry Development (Group)Co has focussed on certain factors that can make its earnings look better than they are. 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. 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.