The subdued stock price reaction suggests that Zhejiang Benli Technology Co., Ltd.'s (SZSE:301065) strong earnings didn't offer any surprises. Our analysis suggests that investors might be missing some promising details.

A Closer Look At Zhejiang Benli Technology'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). 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. 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. 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.

For the year to June 2024, Zhejiang Benli Technology had an accrual ratio of -0.10. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. Indeed, in the last twelve months it reported free cash flow of CN¥142m, well over the CN¥70.5m it reported in profit. Given that Zhejiang Benli Technology had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥142m 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 Zhejiang Benli Technology.

Our Take On Zhejiang Benli Technology's Profit Performance

Zhejiang Benli Technology's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Zhejiang Benli Technology's statutory profit actually understates its earnings potential! And the EPS is up 45% over the last twelve months. 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 want to do dive deeper into Zhejiang Benli Technology, you'd also look into what risks it is currently facing. At Simply Wall St, we found 2 warning signs for Zhejiang Benli Technology and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Zhejiang Benli Technology'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.