Shareholders Shouldn’t Be Too Comfortable With Jiangsu Bojun Industrial Technology's (SZSE:300926) Strong Earnings

Jiangsu Bojun Industrial Technology Co., Ltd (SZSE:300926) recently released a strong earnings report, and the market responded by raising the share price. While the headline numbers were strong, we found some underlying problems once we started looking at what drove earnings.

See our latest analysis for Jiangsu Bojun Industrial Technology

Examining Cashflow Against Jiangsu Bojun Industrial 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. 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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. 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 December 2023, Jiangsu Bojun Industrial Technology had an accrual ratio of 0.33. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Over the last year it actually had negative free cash flow of CN¥337m, in contrast to the aforementioned profit of CN¥308.5m. We also note that Jiangsu Bojun Industrial 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¥337m. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

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.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Jiangsu Bojun Industrial Technology expanded the number of shares on issue by 45% over the last year. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out Jiangsu Bojun Industrial Technology's historical EPS growth by clicking on this link.

A Look At The Impact Of Jiangsu Bojun Industrial Technology's Dilution On Its Earnings Per Share (EPS)

Jiangsu Bojun Industrial Technology has improved its profit over the last three years, with an annualized gain of 358% in that time. In comparison, earnings per share only gained 216% over the same period. And the 109% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 94% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Jiangsu Bojun Industrial Technology can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Jiangsu Bojun Industrial Technology's Profit Performance

As it turns out, Jiangsu Bojun Industrial Technology couldn't match its profit with cashflow and its dilution means that earnings per share growth is lagging net income growth. For the reasons mentioned above, we think that a perfunctory glance at Jiangsu Bojun Industrial 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 Jiangsu Bojun Industrial Technology, you'd also look into what risks it is currently facing. To help with this, we've discovered 3 warning signs (1 is a bit concerning!) that you ought to be aware of before buying any shares in Jiangsu Bojun Industrial Technology.

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 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. 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 that insiders are buying 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.