Jiangxi Yuean Advanced Materials Co.,Ltd.'s (SHSE:688786) recent weak earnings report didn't cause a big stock movement. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.
Examining Cashflow Against Jiangxi Yuean Advanced MaterialsLtd'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Over the twelve months to December 2023, Jiangxi Yuean Advanced MaterialsLtd recorded an accrual ratio of 0.32. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Even though it reported a profit of CN¥79.9m, a look at free cash flow indicates it actually burnt through CN¥79m in the last year. We saw that FCF was CN¥53m a year ago though, so Jiangxi Yuean Advanced MaterialsLtd has at least been able to generate positive FCF in the past.
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 Jiangxi Yuean Advanced MaterialsLtd's Profit Performance
As we discussed above, we think Jiangxi Yuean Advanced MaterialsLtd's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Jiangxi Yuean Advanced MaterialsLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But at least holders can take some solace from the 15% per annum growth in EPS for the last three. 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'd like to know more about Jiangxi Yuean Advanced MaterialsLtd as a business, it's important to be aware of any risks it's facing. For example, Jiangxi Yuean Advanced MaterialsLtd has 2 warning signs (and 1 which can't be ignored) we think you should know about.
Today we've zoomed in on a single data point to better understand the nature of Jiangxi Yuean Advanced MaterialsLtd's profit. But there are plenty of other ways to inform your opinion of a company. 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 that insiders are buying 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.