Jiangsu JIXIN Wind Energy Technology's (SHSE:601218) Soft Earnings Are Actually Better Than They Appear

Jiangsu JIXIN Wind Energy Technology Co., Ltd.'s (SHSE:601218) stock was strong despite it releasing a soft earnings report last week. We think that investors might be looking at some positive factors beyond the earnings numbers.

View our latest analysis for Jiangsu JIXIN Wind Energy Technology

Examining Cashflow Against Jiangsu JIXIN Wind Energy Technology'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Jiangsu JIXIN Wind Energy Technology has an accrual ratio of -0.10 for the year to March 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥360m, well over the CN¥133.4m it reported in profit. Over the last year, Jiangsu JIXIN Wind Energy Technology's free cash flow remained steady.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangsu JIXIN Wind Energy Technology.

Our Take On Jiangsu JIXIN Wind Energy Technology's Profit Performance

As we discussed above, Jiangsu JIXIN Wind Energy Technology has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Jiangsu JIXIN Wind Energy Technology's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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 while earnings quality is important, it's equally important to consider the risks facing Jiangsu JIXIN Wind Energy Technology at this point in time. Case in point: We've spotted 1 warning sign for Jiangsu JIXIN Wind Energy Technology you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Jiangsu JIXIN Wind Energy Technology's profit. 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.