Even though Hangzhou Juheshun New Material Co.,LTD (SHSE:605166 ) posted strong earnings, investors appeared to be underwhelmed. We have done some analysis and have found some comforting factors beneath the profit numbers.
Examining Cashflow Against Hangzhou Juheshun New MaterialLTD'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
For the year to September 2024, Hangzhou Juheshun New MaterialLTD had an accrual ratio of -0.16. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of CN¥305m, well over the CN¥280.2m it reported in profit. Given that Hangzhou Juheshun New MaterialLTD had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥305m would seem to be a step in the right direction.
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 Hangzhou Juheshun New MaterialLTD's Profit Performance
Hangzhou Juheshun New MaterialLTD's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Hangzhou Juheshun New MaterialLTD's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 11% per year over the last three years. 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. If you'd like to know more about Hangzhou Juheshun New MaterialLTD 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 Hangzhou Juheshun New MaterialLTD, 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 Hangzhou Juheshun New MaterialLTD's profit. But there are plenty of other ways to inform your opinion of a company. 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.
