Zhongshan Broad-Ocean Motor Co., Ltd. (SZSE:002249) recently posted some strong earnings, and the market responded positively. Our analysis found some more factors that we think are good for shareholders.

Examining Cashflow Against Zhongshan Broad-Ocean Motor's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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 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.

Over the twelve months to June 2024, Zhongshan Broad-Ocean Motor recorded an accrual ratio of -0.20. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CN¥1.9b in the last year, which was a lot more than its statutory profit of CN¥690.6m. Zhongshan Broad-Ocean Motor's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhongshan Broad-Ocean Motor.

Our Take On Zhongshan Broad-Ocean Motor's Profit Performance

Happily for shareholders, Zhongshan Broad-Ocean Motor produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Zhongshan Broad-Ocean Motor's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Better yet, its EPS are growing strongly, which is nice to see. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. While conducting our analysis, we found that Zhongshan Broad-Ocean Motor has 1 warning sign and it would be unwise to ignore it.

This note has only looked at a single factor that sheds light on the nature of Zhongshan Broad-Ocean Motor'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. 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.