Zhejiang Asia-Pacific Mechanical & ElectronicLtd's (SZSE:002284) Earnings May Just Be The Starting Point

The subdued stock price reaction suggests that Zhejiang Asia-Pacific Mechanical & Electronic Co.,Ltd's (SZSE:002284) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

View our latest analysis for Zhejiang Asia-Pacific Mechanical & ElectronicLtd

Zooming In On Zhejiang Asia-Pacific Mechanical & ElectronicLtd'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. 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 December 2023, Zhejiang Asia-Pacific Mechanical & ElectronicLtd recorded an accrual ratio of -0.24. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of CN¥526m in the last year, which was a lot more than its statutory profit of CN¥97.0m. Zhejiang Asia-Pacific Mechanical & ElectronicLtd's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhejiang Asia-Pacific Mechanical & ElectronicLtd.

Our Take On Zhejiang Asia-Pacific Mechanical & ElectronicLtd's Profit Performance

As we discussed above, Zhejiang Asia-Pacific Mechanical & ElectronicLtd's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Zhejiang Asia-Pacific Mechanical & ElectronicLtd's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Zhejiang Asia-Pacific Mechanical & ElectronicLtd as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Zhejiang Asia-Pacific Mechanical & ElectronicLtd, and understanding it should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Zhejiang Asia-Pacific Mechanical & ElectronicLtd's profit. But there are plenty of other ways to inform your opinion of a company. 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 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.