Jiangsu Liance Electromechanical Technology Co., Ltd.'s (SHSE:688113) healthy profit numbers didn't contain any surprises for investors. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

View our latest analysis for Jiangsu Liance Electromechanical Technology

Zooming In On Jiangsu Liance Electromechanical Technology'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). The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. This ratio tells us how much of a company's profit is not backed by free cashflow.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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".

Jiangsu Liance Electromechanical Technology has an accrual ratio of 0.38 for the year to September 2022. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of CN¥37m, in contrast to the aforementioned profit of CN¥87.6m. We also note that Jiangsu Liance Electromechanical 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¥37m.

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

Our Take On Jiangsu Liance Electromechanical Technology's Profit Performance

As we discussed above, we think Jiangsu Liance Electromechanical Technology's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Jiangsu Liance Electromechanical 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. Nonetheless, it's still worth noting that its earnings per share have grown at 32% over the last three years. 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 want to do dive deeper into Jiangsu Liance Electromechanical Technology, you'd also look into what risks it is currently facing. At Simply Wall St, we found 1 warning sign for Jiangsu Liance Electromechanical Technology and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Jiangsu Liance Electromechanical Technology'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.