Earnings Troubles May Signal Larger Issues for Qingdao Hi-Tech Moulds & Plastics Technology (SZSE:301022) Shareholders

Despite Qingdao Hi-Tech Moulds & Plastics Technology Co., Ltd.'s (SZSE:301022) most recent earnings report having soft headline numbers, its stock has had a positive performance. We looked at the details, and we think that investors may be responding to some encouraging factors.

Check out our latest analysis for Qingdao Hi-Tech Moulds & Plastics Technology

Zooming In On Qingdao Hi-Tech Moulds & Plastics 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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 March 2024, Qingdao Hi-Tech Moulds & Plastics Technology had an accrual ratio of 0.27. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Even though it reported a profit of CN¥14.7m, a look at free cash flow indicates it actually burnt through CN¥191m in the last year. We also note that Qingdao Hi-Tech Moulds & Plastics 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¥191m. 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 Qingdao Hi-Tech Moulds & Plastics Technology.

How Do Unusual Items Influence Profit?

Unfortunately (in the short term) Qingdao Hi-Tech Moulds & Plastics Technology saw its profit reduced by unusual items worth CN¥15m. If this was a non-cash charge, it would have made the accrual ratio better, if cashflow had stayed strong, so it's not great to see in combination with an uninspiring accrual ratio. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Qingdao Hi-Tech Moulds & Plastics Technology to produce a higher profit next year, all else being equal.

Our Take On Qingdao Hi-Tech Moulds & Plastics Technology's Profit Performance

Qingdao Hi-Tech Moulds & Plastics Technology saw unusual items weigh on its profit, which should have made it easier to show high cash conversion, which it did not do, according to its accrual ratio. Given the contrasting considerations, we don't have a strong view as to whether Qingdao Hi-Tech Moulds & Plastics Technology's profits are an apt reflection of its underlying potential for profit. 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. Case in point: We've spotted 5 warning signs for Qingdao Hi-Tech Moulds & Plastics Technology you should be mindful of and 3 of these are a bit concerning.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. 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.