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Zhejiang Cayi Vacuum Container's (SZSE:301004) Earnings Are Weaker Than They Seem

Simply Wall St ·  Nov 6, 2024 07:32

Last week's profit announcement from Zhejiang Cayi Vacuum Container Co., Ltd. (SZSE:301004) was underwhelming for investors, despite headline numbers being robust. Our analysis uncovered some concerning factors that we believe the market might be paying attention to.

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SZSE:301004 Earnings and Revenue History November 5th 2024

Examining Cashflow Against Zhejiang Cayi Vacuum Container's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. 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.

For the year to September 2024, Zhejiang Cayi Vacuum Container had an accrual ratio of 0.45. That means it didn't generate anywhere near enough free cash flow to match its profit. Statistically speaking, that's a real negative for future earnings. In fact, it had free cash flow of CN¥286m in the last year, which was a lot less than its statutory profit of CN¥689.2m. At this point we should mention that Zhejiang Cayi Vacuum Container did manage to increase its free cash flow in the last twelve months

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 Zhejiang Cayi Vacuum Container's Profit Performance

As we discussed above, we think Zhejiang Cayi Vacuum Container's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Zhejiang Cayi Vacuum Container's underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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 Zhejiang Cayi Vacuum Container as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 2 warning signs for Zhejiang Cayi Vacuum Container (of which 1 is significant!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Zhejiang Cayi Vacuum Container'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.

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.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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