A lackluster earnings announcement from Ji'an Mankun Technology Co., Ltd. (SZSE:301132) last week didn't sink the stock price. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

A Closer Look At Ji'an Mankun Technology's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to September 2024, Ji'an Mankun Technology recorded an accrual ratio of 0.20. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of CN¥88m, in contrast to the aforementioned profit of CN¥92.4m. We also note that Ji'an Mankun Technology's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥88m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Ji'an Mankun Technology.

Our Take On Ji'an Mankun Technology's Profit Performance

Ji'an Mankun Technology didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Ji'an Mankun Technology's true underlying earnings power is actually less than its statutory profit. Sadly, its EPS was down over the last twelve months. 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. If you'd like to know more about Ji'an Mankun Technology as a business, it's important to be aware of any risks it's facing. When we did our research, we found 3 warning signs for Ji'an Mankun Technology (1 is significant!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Ji'an Mankun Technology'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. 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.