Investors were underwhelmed by the solid earnings posted by Shanghai Lujiazui Finance & Trade Zone Development Co.,Ltd. (SHSE:600663) recently. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

A Closer Look At Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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".

Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd has an accrual ratio of -0.10 for the year to June 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of CN¥11b during the period, dwarfing its reported profit of CN¥914.0m. Notably, Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd had negative free cash flow last year, so the CN¥11b it produced this year was a welcome improvement.

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 Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd's Profit Performance

As we discussed above, Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd has perfectly satisfactory free cash flow relative to profit. Because of this, we think Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 42% over the last twelve months. 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 Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd, you'd also look into what risks it is currently facing. For example, we've discovered 3 warning signs that you should run your eye over to get a better picture of Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd.

This note has only looked at a single factor that sheds light on the nature of Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd'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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.