Jiangsu JIXIN Wind Energy Technology's (SHSE:601218) Soft Earnings Don't Show The Whole Picture

Soft earnings didn't appear to concern Jiangsu JIXIN Wind Energy Technology Co., Ltd.'s (SHSE:601218) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Check out our latest analysis for Jiangsu JIXIN Wind Energy Technology

Zooming In On Jiangsu JIXIN Wind Energy 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2024, Jiangsu JIXIN Wind Energy Technology had an accrual ratio of -0.11. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. Indeed, in the last twelve months it reported free cash flow of CN¥311m, well over the CN¥74.0m it reported in profit. Jiangsu JIXIN Wind Energy Technology's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

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

Jiangsu JIXIN Wind Energy Technology's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. 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. If you want to do dive deeper into Jiangsu JIXIN Wind Energy Technology, you'd also look into what risks it is currently facing. For instance, we've identified 3 warning signs for Jiangsu JIXIN Wind Energy Technology (1 is significant) you should be familiar with.

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. 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.