Investors Shouldn't Be Too Comfortable With TianJin JinRong TianYu Precision Machinery's (SZSE:300988) Earnings

Despite announcing strong earnings, TianJin JinRong TianYu Precision Machinery Inc.'s (SZSE:300988) stock was sluggish. We think that the market might be paying attention to some underlying factors that they find to be concerning.

View our latest analysis for TianJin JinRong TianYu Precision Machinery

Examining Cashflow Against TianJin JinRong TianYu Precision Machinery's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to December 2023, TianJin JinRong TianYu Precision Machinery recorded an accrual ratio of 0.33. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥253m despite its profit of CN¥92.1m, mentioned above. We also note that TianJin JinRong TianYu Precision Machinery's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥253m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of TianJin JinRong TianYu Precision Machinery.

Our Take On TianJin JinRong TianYu Precision Machinery's Profit Performance

As we discussed above, we think TianJin JinRong TianYu Precision Machinery's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that TianJin JinRong TianYu Precision Machinery's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But at least holders can take some solace from the 5.1% per annum growth in EPS for the last three. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with TianJin JinRong TianYu Precision Machinery (including 2 which are a bit concerning).

This note has only looked at a single factor that sheds light on the nature of TianJin JinRong TianYu Precision Machinery's profit. 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 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.