We value Shenzhen Synovatio Technology (SZSE:002912)'s returns above its statutory profit

Despite earning good profits, Shenzhen Synovatio Technology Co., Ltd. (SZSE:002912 ) stock price is very low. We did some analysis and found some encouraging factors that we think shareholders should consider.

Check out our latest analysis for Shenzhen Synovatio Technology.

A closer look at Shenzhen Synovatio Technology's earnings

Many investors have never heard of it Accrual rate from cash flow, but it's actually a useful measure of how well a company's profits are supported by its free cash flow (FCF) over a given period of time. Simply put, this ratio subtracts his FCF from his net income and divides that number by the company's average operating assets for the period. This ratio shows how much a company's profit exceeds its FCF.

So a negative accrual rate is a good thing. That's because it shows that a company is bringing in more free cash flow than profit. This does not suggest that you need to worry about positive accrual rates, but it is worth noting if the accrual rate is fairly high. That's because some academic research suggests that high accrual ratios tend to lead to lower profits and lower profit growth rates.

For the twelve months ending March 2024, Shenzhen Sinovatio Technology recorded an accrual ratio of -0.25. Therefore, its statutory earnings are significantly less than its free cash flow. That means it generated CA$178m in free cash flow during the period, significantly higher than its reported profit of CA$17m. Notably, Shenzhen Sinovatio Technology had negative free cash flow last year, so his CA$178m produced this year is a welcome improvement. That being said, there's more to this story. The accrual rate reflects, at least in part, the impact of unusual items on statutory profit.

With that in mind, you might wonder what analysts are predicting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Impact of abnormal items on profit

Surprisingly, given that Shenzhen Sinovatio Technology's accrual ratio suggests strong cash conversion, paper profit actually increased by CA$34m in unusual items. We like to see profits increase, but we tend to be a little more cautious when unusual items make a big contribution. We've crunched the numbers for most publicly traded companies around the world, and it's very common for rare items to be one-offs. Considering the name, this is not surprising. We can see that Shenzhen Sinovatio Technology's positive abnormal items were quite significant compared to his profit for the year ending March 2024. As a result, we can infer that the unusual items are increasing statutory profit significantly more than normal.

Our view on Shenzhen Synovatio Technology's profit performance

In conclusion, Shenzhen Sinovatio Technology's accrual ratio suggests that the quality of its statutory profits is high, while profits were boosted by unusual items. Given these contrasting considerations, we do not have a strong view on whether Shenzhen Synovatio Technology's earnings adequately reflect its underlying profit potential. If you want to learn more about Shenzhen Synovatio Technology, you should also find out what risks it currently faces.You want to know, what we found 2 warning signs for Shenzhen Sinovatio Technology You'll want to know about these.

In this article, we've considered a number of factors that can undermine the usefulness of profit figures as a guide to your business. But there are many other ways to convey your opinion about a company. Some consider a high return on equity to be a good sign of a high-quality business.It may take a little research on your behalf, but you may find the following free A collection of companies with a high return on equity, or a list of stocks that insiders are buying to help.

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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.