Guodian Nanjing Automation Co., Ltd. (SHSE:600268) recently posted some strong earnings, and the market responded positively. Our analysis found some more factors that we think are good for shareholders.

Zooming In On Guodian Nanjing Automation'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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 September 2024, Guodian Nanjing Automation had an accrual ratio of -0.41. 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¥1.6b, well over the CN¥274.0m it reported in profit. Guodian Nanjing Automation's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guodian Nanjing Automation.

Our Take On Guodian Nanjing Automation's Profit Performance

Happily for shareholders, Guodian Nanjing Automation produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Guodian Nanjing Automation's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 19% over the last twelve months. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. You'd be interested to know, that we found 1 warning sign for Guodian Nanjing Automation and you'll want to know about this.

This note has only looked at a single factor that sheds light on the nature of Guodian Nanjing Automation'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.