C&D Holsin Engineering Consulting Co., Ltd's (SHSE:603909) recent earnings report didn't offer any surprises, with the shares unchanged over the last week. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

A Closer Look At C&D Holsin Engineering Consulting'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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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 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. 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 December 2023, C&D Holsin Engineering Consulting had an accrual ratio of -0.57. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CN¥428m in the last year, which was a lot more than its statutory profit of CN¥65.9m. C&D Holsin Engineering Consulting's free cash flow improved over the last year, which is generally good to see.

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 C&D Holsin Engineering Consulting's Profit Performance

Happily for shareholders, C&D Holsin Engineering Consulting produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that C&D Holsin Engineering Consulting's statutory profit actually understates its earnings potential! And the EPS is up 40% annually, over the last three years. 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 C&D Holsin Engineering Consulting, you'd also look into what risks it is currently facing. Case in point: We've spotted 2 warning signs for C&D Holsin Engineering Consulting you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of C&D Holsin Engineering Consulting'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.

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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.