Statutory Profit Doesn't Reflect How Good Qinqin Foodstuffs Group (Cayman)'s (HKG:1583) Earnings Are

Even though Qinqin Foodstuffs Group (Cayman) Company Limited (HKG:1583 ) posted strong earnings, investors appeared to be underwhelmed. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

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Zooming In On Qinqin Foodstuffs Group (Cayman)'s Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.

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".

For the year to December 2024, Qinqin Foodstuffs Group (Cayman) had an accrual ratio of -0.17. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥172m, well over the CN¥21.1m it reported in profit. Given that Qinqin Foodstuffs Group (Cayman) had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥172m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Qinqin Foodstuffs Group (Cayman) .

Our Take On Qinqin Foodstuffs Group (Cayman)'s Profit Performance

As we discussed above, Qinqin Foodstuffs Group (Cayman)'s accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Qinqin Foodstuffs Group (Cayman)'s underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Qinqin Foodstuffs Group (Cayman) as a business, it's important to be aware of any risks it's facing. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Qinqin Foodstuffs Group (Cayman).

Today we've zoomed in on a single data point to better understand the nature of Qinqin Foodstuffs Group (Cayman)'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.