Soft earnings didn't appear to concern Shandong Wit Dyne Health Co.,Ltd.'s (SZSE:000915) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

A Closer Look At Shandong Wit Dyne HealthLtd'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 September 2024, Shandong Wit Dyne HealthLtd recorded an accrual ratio of -0.19. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of CN¥733m in the last year, which was a lot more than its statutory profit of CN¥489.9m. Shandong Wit Dyne HealthLtd's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

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 Shandong Wit Dyne HealthLtd's Profit Performance

Happily for shareholders, Shandong Wit Dyne HealthLtd produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Shandong Wit Dyne HealthLtd's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 28% per year over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Shandong Wit Dyne HealthLtd at this point in time. While conducting our analysis, we found that Shandong Wit Dyne HealthLtd has 1 warning sign and it would be unwise to ignore it.

Today we've zoomed in on a single data point to better understand the nature of Shandong Wit Dyne HealthLtd'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.