The recent earnings posted by Sichuan Zigong Conveying Machine Group Co., Ltd. (SZSE:001288) were solid, but the stock didn't move as much as we expected. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.
Check out our latest analysis for Sichuan Zigong Conveying Machine Group
A Closer Look At Sichuan Zigong Conveying Machine Group'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.
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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Sichuan Zigong Conveying Machine Group has an accrual ratio of 0.22 for the year to September 2023. 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¥127m, in contrast to the aforementioned profit of CN¥101.1m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥127m, this year, indicates high risk.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sichuan Zigong Conveying Machine Group.
Our Take On Sichuan Zigong Conveying Machine Group's Profit Performance
Sichuan Zigong Conveying Machine Group's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Therefore, it seems possible to us that Sichuan Zigong Conveying Machine Group's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 12% EPS growth in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Sichuan Zigong Conveying Machine Group, you'd also look into what risks it is currently facing. Our analysis shows 3 warning signs for Sichuan Zigong Conveying Machine Group (2 make us uncomfortable!) and we strongly recommend you look at these before investing.
This note has only looked at a single factor that sheds light on the nature of Sichuan Zigong Conveying Machine Group'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 that insiders are buying.
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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.
