The Strong Earnings Posted By Shandong Swan CottonIndustrial Machinery StockLtd (SHSE:603029) Are A Good Indication Of The Strength Of The Business

Shandong Swan CottonIndustrial Machinery Stock Co.,Ltd.'s (SHSE:603029) earnings announcement last week was disappointing for investors, despite the decent profit numbers. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

View our latest analysis for Shandong Swan CottonIndustrial Machinery StockLtd

Zooming In On Shandong Swan CottonIndustrial Machinery StockLtd's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to December 2023, Shandong Swan CottonIndustrial Machinery StockLtd recorded an accrual ratio of -0.10. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of CN¥118m in the last year, which was a lot more than its statutory profit of CN¥65.4m. Notably, Shandong Swan CottonIndustrial Machinery StockLtd had negative free cash flow last year, so the CN¥118m it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shandong Swan CottonIndustrial Machinery StockLtd.

Our Take On Shandong Swan CottonIndustrial Machinery StockLtd's Profit Performance

As we discussed above, Shandong Swan CottonIndustrial Machinery StockLtd has perfectly satisfactory free cash flow relative to profit. Because of this, we think Shandong Swan CottonIndustrial Machinery StockLtd's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. At Simply Wall St, we found 1 warning sign for Shandong Swan CottonIndustrial Machinery StockLtd and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Shandong Swan CottonIndustrial Machinery StockLtd'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.