We Think Jiangnan Mould & Plastic Technology's (SZSE:000700) Solid Earnings Are Understated

The market seemed underwhelmed by last week's earnings announcement from Jiangnan Mould & Plastic Technology Co., Ltd. (SZSE:000700) despite the healthy numbers. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

Check out our latest analysis for Jiangnan Mould & Plastic Technology

A Closer Look At Jiangnan Mould & Plastic Technology's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Jiangnan Mould & Plastic Technology has an accrual ratio of -0.12 for the year to June 2024. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of CN¥1.1b during the period, dwarfing its reported profit of CN¥584.0m. Jiangnan Mould & Plastic Technology shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangnan Mould & Plastic Technology.

Our Take On Jiangnan Mould & Plastic Technology's Profit Performance

Jiangnan Mould & Plastic Technology's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Jiangnan Mould & Plastic Technology's statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 25% in the last year. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. At Simply Wall St, we found 1 warning sign for Jiangnan Mould & Plastic Technology and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Jiangnan Mould & Plastic Technology'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. 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.