Suzhou Jin Hong Shun Auto Parts' (SHSE:603922) Earnings May Just Be The Starting Point

Even though Suzhou Jin Hong Shun Auto Parts Co., Ltd.'s (SHSE:603922) recent earnings release was robust, the market didn't seem to notice. We think that investors have missed some encouraging factors underlying the profit figures.

See our latest analysis for Suzhou Jin Hong Shun Auto Parts

Examining Cashflow Against Suzhou Jin Hong Shun Auto Parts' 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. 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 June 2024, Suzhou Jin Hong Shun Auto Parts had an accrual ratio of -0.65. 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¥206m, well over the CN¥22.2m it reported in profit. Suzhou Jin Hong Shun Auto Parts shareholders are no doubt pleased that free cash flow improved over the last twelve months. 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 Suzhou Jin Hong Shun Auto Parts.

The Impact Of Unusual Items On Profit

Surprisingly, given Suzhou Jin Hong Shun Auto Parts' accrual ratio implied strong cash conversion, its paper profit was actually boosted by CN¥4.0m in unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. If Suzhou Jin Hong Shun Auto Parts doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Suzhou Jin Hong Shun Auto Parts' Profit Performance

In conclusion, Suzhou Jin Hong Shun Auto Parts' accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Based on these factors, we think that Suzhou Jin Hong Shun Auto Parts' profits are a reasonably conservative guide to its underlying profitability. If you'd like to know more about Suzhou Jin Hong Shun Auto Parts 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 Suzhou Jin Hong Shun Auto Parts 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, as a guide to a business. 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.

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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.