State Grid Yingda Co.,Ltd.'s (SHSE:600517) strong earnings report was rewarded with a positive stock price move. We have done some analysis, and we found several positive factors beyond the profit numbers.

Zooming In On State Grid YingdaLtd'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). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. 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 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, State Grid YingdaLtd had an accrual ratio of -0.38. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of CN¥5.2b in the last year, which was a lot more than its statutory profit of CN¥1.67b. Given that State Grid YingdaLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥5.2b would seem to be a step in the right direction. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of State Grid YingdaLtd.

The Impact Of Unusual Items On Profit

Surprisingly, given State Grid YingdaLtd's accrual ratio implied strong cash conversion, its paper profit was actually boosted by CN¥233m in unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On State Grid YingdaLtd's Profit Performance

In conclusion, State Grid YingdaLtd's accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Considering all the aforementioned, we'd venture that State Grid YingdaLtd's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. If you'd like to know more about State Grid YingdaLtd as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 1 warning sign for State Grid YingdaLtd you should know about.

Our examination of State Grid YingdaLtd has focussed on certain factors that can make its earnings look better than they are. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.