Shareholders In Anhui Jianghuai Automobile GroupLtd (SHSE:600418) Should Look Beyond Earnings For The Full Story

Despite posting strong earnings, Anhui Jianghuai Automobile Group Corp.,Ltd.'s (SHSE:600418) stock didn't move much over the last week. We looked deeper into the numbers and found that shareholders might be concerned with some underlying weaknesses.

Check out our latest analysis for Anhui Jianghuai Automobile GroupLtd

Zooming In On Anhui Jianghuai Automobile GroupLtd'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 March 2024, Anhui Jianghuai Automobile GroupLtd had an accrual ratio of 0.21. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥1.7b despite its profit of CN¥109.0m, mentioned above. It's worth noting that Anhui Jianghuai Automobile GroupLtd generated positive FCF of CN¥1.7b a year ago, so at least they've done it in the past. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part. One positive for Anhui Jianghuai Automobile GroupLtd shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Anhui Jianghuai Automobile GroupLtd's profit was boosted by unusual items worth CN¥1.3b in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. Anhui Jianghuai Automobile GroupLtd had a rather significant contribution from unusual items relative to its profit to March 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Anhui Jianghuai Automobile GroupLtd's Profit Performance

Anhui Jianghuai Automobile GroupLtd had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Anhui Jianghuai Automobile GroupLtd's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Anhui Jianghuai Automobile GroupLtd as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 1 warning sign for Anhui Jianghuai Automobile GroupLtd and you'll want to know about it.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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 that insiders are buying.

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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.