Investors were underwhelmed by the solid earnings posted by Ningbo Jianan Electronics Co.,Ltd (SZSE:300880) recently. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

A Closer Look At Ningbo Jianan ElectronicsLtd'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. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Ningbo Jianan ElectronicsLtd has an accrual ratio of -0.12 for the year to September 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥263m, well over the CN¥219.9m it reported in profit. Ningbo Jianan ElectronicsLtd shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Ningbo Jianan ElectronicsLtd.

Our Take On Ningbo Jianan ElectronicsLtd's Profit Performance

As we discussed above, Ningbo Jianan ElectronicsLtd has perfectly satisfactory free cash flow relative to profit. Because of this, we think Ningbo Jianan ElectronicsLtd's earnings potential is at least as good as it seems, and maybe even better! 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. You'd be interested to know, that we found 2 warning signs for Ningbo Jianan ElectronicsLtd and you'll want to know about these bad boys.

Today we've zoomed in on a single data point to better understand the nature of Ningbo Jianan ElectronicsLtd'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.