Despite posting healthy earnings, Shuifa Energas Gas Co., Ltd.'s (SHSE:603318 ) stock has been quite weak. We have done some analysis, and found some encouraging factors that we believe the shareholders should consider.

Examining Cashflow Against Shuifa Energas Gas' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. The ratio shows us how much a company's profit exceeds its FCF.

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".

Shuifa Energas Gas has an accrual ratio of -0.10 for the year to June 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥357m, well over the CN¥80.7m it reported in profit. Shuifa Energas Gas shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shuifa Energas Gas.

Our Take On Shuifa Energas Gas' Profit Performance

Shuifa Energas Gas' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Shuifa Energas Gas' earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 60% annually, over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 2 warning signs for Shuifa Energas Gas you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Shuifa Energas Gas' 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 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.