Guangzhou Jinzhong Auto Parts Manufacturing's (SZSE:301133) Solid Profits Have Weak Fundamentals

Despite announcing strong earnings, Guangzhou Jinzhong Auto Parts Manufacturing Co., Ltd.'s (SZSE:301133) stock was sluggish. We think that the market might be paying attention to some underlying factors that they find to be concerning.

Check out our latest analysis for Guangzhou Jinzhong Auto Parts Manufacturing

Examining Cashflow Against Guangzhou Jinzhong Auto Parts Manufacturing'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Guangzhou Jinzhong Auto Parts Manufacturing has an accrual ratio of 0.46 for the year to September 2024. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of CN¥95.6m, a look at free cash flow indicates it actually burnt through CN¥372m in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥372m, this year, indicates high risk.

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.

Our Take On Guangzhou Jinzhong Auto Parts Manufacturing's Profit Performance

As we have made quite clear, we're a bit worried that Guangzhou Jinzhong Auto Parts Manufacturing didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Guangzhou Jinzhong Auto Parts Manufacturing's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 37% per annum growth in EPS for the last three. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Guangzhou Jinzhong Auto Parts Manufacturing, you'd also look into what risks it is currently facing. For example, Guangzhou Jinzhong Auto Parts Manufacturing has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of Guangzhou Jinzhong Auto Parts Manufacturing'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 with high insider ownership.

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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.