Investors were disappointed with Wuxi Lead Intelligent Equipment CO.,LTD.'s (SZSE:300450) recent earnings. We think that they may have more to worry about than just soft profit numbers.

Examining Cashflow Against Wuxi Lead Intelligent EquipmentLTD's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2024, Wuxi Lead Intelligent EquipmentLTD had an accrual ratio of 0.24. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Over the last year it actually had negative free cash flow of CN¥2.5b, in contrast to the aforementioned profit of CN¥59.4m. We also note that Wuxi Lead Intelligent EquipmentLTD's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥2.5b. However, that's not all there is to consider. 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

Given the accrual ratio, it's not overly surprising that Wuxi Lead Intelligent EquipmentLTD's profit was boosted by unusual items worth CN¥71m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. We can see that Wuxi Lead Intelligent EquipmentLTD's positive unusual items were quite significant relative to its profit in the year to September 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Wuxi Lead Intelligent EquipmentLTD's Profit Performance

Wuxi Lead Intelligent EquipmentLTD had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Wuxi Lead Intelligent EquipmentLTD's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Wuxi Lead Intelligent EquipmentLTD, you'd also look into what risks it is currently facing. To that end, you should learn about the 4 warning signs we've spotted with Wuxi Lead Intelligent EquipmentLTD (including 2 which make us uncomfortable).

Our examination of Wuxi Lead Intelligent EquipmentLTD has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.