Ningbo Yibin Electronic Technology's (SZSE:001278) Earnings Quality Is Low

The recent earnings release from Ningbo Yibin Electronic Technology Co., Ltd. (SZSE:001278 ) was disappointing to investors. We think there is more to the story than simply soft profit numbers. Our analysis shows that there are some other factors of concern.

See our latest analysis for Ningbo Yibin Electronic Technology

Zooming In On Ningbo Yibin Electronic Technology's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. The ratio shows us how much a company's profit exceeds its FCF.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to September 2024, Ningbo Yibin Electronic Technology recorded an accrual ratio of 0.39. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of CN¥81.3m, a look at free cash flow indicates it actually burnt through CN¥335m in the last year. We also note that Ningbo Yibin Electronic Technology's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥335m. 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 Ningbo Yibin Electronic Technology.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Ningbo Yibin Electronic Technology's profit was boosted by unusual items worth CN¥20m 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. 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 Ningbo Yibin Electronic Technology 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 Ningbo Yibin Electronic Technology's Profit Performance

Ningbo Yibin Electronic Technology had a weak accrual ratio, but its profit did receive a boost from unusual items. For the reasons mentioned above, we think that a perfunctory glance at Ningbo Yibin Electronic Technology's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Ningbo Yibin Electronic Technology, you'd also look into what risks it is currently facing. For example, Ningbo Yibin Electronic Technology has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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. Some people consider a high return on equity to be a good sign of a quality business. 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.

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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.