Logory Logistics Technology Co., Ltd. (HKG:2482) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

Examining Cashflow Against Logory Logistics Technology'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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".

Over the twelve months to June 2024, Logory Logistics Technology recorded an accrual ratio of 0.99. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of CN¥199m, in contrast to the aforementioned profit of CN¥20.6m. We also note that Logory Logistics Technology's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥199m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Logory Logistics Technology.

Our Take On Logory Logistics Technology's Profit Performance

As we discussed above, we think Logory Logistics Technology's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Logory Logistics Technology's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. On the bright side, the company showed enough improvement to book a profit this year, after losing money 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 Logory Logistics Technology, you'd also look into what risks it is currently facing. Case in point: We've spotted 1 warning sign for Logory Logistics Technology you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Logory Logistics Technology'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. 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.