The market was pleased with the recent earnings report from Guangdong Tecsun Science & Technology Co.,Ltd. (SZSE:002908), despite the profit numbers being soft. However, we think the company is showing some signs that things are more promising than they seem.
A Closer Look At Guangdong Tecsun Science & TechnologyLtd'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. 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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
For the year to June 2024, Guangdong Tecsun Science & TechnologyLtd had an accrual ratio of -0.11. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of CN¥141m, well over the CN¥42.5m it reported in profit. Guangdong Tecsun Science & TechnologyLtd's free cash flow improved over the last year, which is generally good to see.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guangdong Tecsun Science & TechnologyLtd.
Our Take On Guangdong Tecsun Science & TechnologyLtd's Profit Performance
Guangdong Tecsun Science & TechnologyLtd's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Guangdong Tecsun Science & TechnologyLtd's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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 want to do dive deeper into Guangdong Tecsun Science & TechnologyLtd, you'd also look into what risks it is currently facing. For example - Guangdong Tecsun Science & TechnologyLtd has 1 warning sign we think you should be aware of.
This note has only looked at a single factor that sheds light on the nature of Guangdong Tecsun Science & TechnologyLtd's profit. 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.