When companies post strong earnings, the stock generally performs well, just like Suzhou Electrical Apparatus Science Academy Co., Ltd.'s (SZSE:300215) stock has recently. We have done some analysis, and we found several positive factors beyond the profit numbers.

A Closer Look At Suzhou Electrical Apparatus Science Academy's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Suzhou Electrical Apparatus Science Academy has an accrual ratio of -0.16 for the year to March 2024. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of CN¥405m in the last year, which was a lot more than its statutory profit of CN¥31.4m. Suzhou Electrical Apparatus Science Academy shareholders are no doubt pleased that free cash flow improved over the last twelve months. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Suzhou Electrical Apparatus Science Academy.

The Impact Of Unusual Items On Profit

Suzhou Electrical Apparatus Science Academy's profit was reduced by unusual items worth CN¥10m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. In a scenario where those unusual items included non-cash charges, we'd expect to see a strong accrual ratio, which is exactly what has happened in this case. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. If Suzhou Electrical Apparatus Science Academy doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Suzhou Electrical Apparatus Science Academy's Profit Performance

In conclusion, both Suzhou Electrical Apparatus Science Academy's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Looking at all these factors, we'd say that Suzhou Electrical Apparatus Science Academy's underlying earnings power is at least as good as the statutory numbers would make it seem. So while earnings quality is important, it's equally important to consider the risks facing Suzhou Electrical Apparatus Science Academy at this point in time. Be aware that Suzhou Electrical Apparatus Science Academy is showing 2 warning signs in our investment analysis and 1 of those is a bit unpleasant...

After our examination into the nature of Suzhou Electrical Apparatus Science Academy's profit, we've come away optimistic for the company. 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.