The subdued market reaction suggests that Jiangsu Teeyer Intelligent Equipment Co.,Ltd.'s (SHSE:603273) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

Examining Cashflow Against Jiangsu Teeyer Intelligent EquipmentLtd'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. 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, Jiangsu Teeyer Intelligent EquipmentLtd recorded an accrual ratio of 2.99. 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¥52.1m, a look at free cash flow indicates it actually burnt through CN¥199m in the last year. We saw that FCF was CN¥139m a year ago though, so Jiangsu Teeyer Intelligent EquipmentLtd has at least been able to generate positive FCF in the past. The good news for shareholders is that Jiangsu Teeyer Intelligent EquipmentLtd's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangsu Teeyer Intelligent EquipmentLtd.

Our Take On Jiangsu Teeyer Intelligent EquipmentLtd's Profit Performance

As we discussed above, we think Jiangsu Teeyer Intelligent EquipmentLtd's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Jiangsu Teeyer Intelligent EquipmentLtd's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. 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 Jiangsu Teeyer Intelligent EquipmentLtd as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Jiangsu Teeyer Intelligent EquipmentLtd, and understanding this should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Jiangsu Teeyer Intelligent EquipmentLtd'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. 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.