Shenzhen VMAX New Energy Co., Ltd.'s (SHSE:688612) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

Examining Cashflow Against Shenzhen VMAX New Energy'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. 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. 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 June 2024, Shenzhen VMAX New Energy had an accrual ratio of 0.43. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of CN¥506.3m, a look at free cash flow indicates it actually burnt through CN¥79m in the last year. We also note that Shenzhen VMAX New Energy's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥79m.

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.

Our Take On Shenzhen VMAX New Energy's Profit Performance

As we discussed above, we think Shenzhen VMAX New Energy's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Shenzhen VMAX New Energy's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Shenzhen VMAX New Energy as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 2 warning signs we've spotted with Shenzhen VMAX New Energy (including 1 which makes us a bit uncomfortable).

Today we've zoomed in on a single data point to better understand the nature of Shenzhen VMAX New Energy's profit. 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.