Soft earnings didn't appear to concern Jiangsu Provincial Agricultural Reclamation and Development Co.,Ltd.'s (SHSE:601952) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.
Zooming In On Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's Earnings
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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 December 2023, Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd recorded an accrual ratio of -0.21. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of CN¥1.8b during the period, dwarfing its reported profit of CN¥816.2m. Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's free cash flow improved over the last year, which is generally good to see. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.
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.
The Impact Of Unusual Items On Profit
Surprisingly, given Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's accrual ratio implied strong cash conversion, its paper profit was actually boosted by CN¥86m in unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. If Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.
Our Take On Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's Profit Performance
Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Based on these factors, we think that Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd's profits are a reasonably conservative guide to its underlying profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. At Simply Wall St, we found 1 warning sign for Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd and we think they deserve your attention.
Our examination of Jiangsu Provincial Agricultural Reclamation and DevelopmentLtd has focussed on certain factors that can make its earnings look better than they are. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.