Even though Guangdong New Grand Long Packing Co., Ltd. (SZSE:002836 ) posted strong earnings, investors appeared to be underwhelmed. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

Zooming In On Guangdong New Grand Long Packing'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. 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. 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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2024, Guangdong New Grand Long Packing had an accrual ratio of -0.14. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of CN¥79m during the period, dwarfing its reported profit of CN¥55.0m. Given that Guangdong New Grand Long Packing had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥79m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guangdong New Grand Long Packing.

Our Take On Guangdong New Grand Long Packing's Profit Performance

As we discussed above, Guangdong New Grand Long Packing has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Guangdong New Grand Long Packing's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at an extremely impressive rate 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'd like to know more about Guangdong New Grand Long Packing as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 1 warning sign for Guangdong New Grand Long Packing you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Guangdong New Grand Long Packing's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.