Guangzhou Ruoyuchen Technology Co.,Ltd.'s (SZSE:003010) strong earnings report was rewarded with a positive stock price move. Our analysis found some more factors that we think are good for shareholders.

Examining Cashflow Against Guangzhou Ruoyuchen TechnologyLtd'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. 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, Guangzhou Ruoyuchen TechnologyLtd had an accrual ratio of -0.16. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of CN¥214m during the period, dwarfing its reported profit of CN¥78.3m. Given that Guangzhou Ruoyuchen TechnologyLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥214m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guangzhou Ruoyuchen TechnologyLtd.

Our Take On Guangzhou Ruoyuchen TechnologyLtd's Profit Performance

Guangzhou Ruoyuchen TechnologyLtd's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Guangzhou Ruoyuchen TechnologyLtd's statutory profit actually understates its earnings potential! And the EPS is up 60% over the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Guangzhou Ruoyuchen TechnologyLtd as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 2 warning signs we've spotted with Guangzhou Ruoyuchen TechnologyLtd (including 1 which is a bit concerning).

Today we've zoomed in on a single data point to better understand the nature of Guangzhou Ruoyuchen TechnologyLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.