Anhui Anfu Battery TechnologyLtd's (SHSE:603031) Earnings Are Weaker Than They Seem

Despite posting some strong earnings, the market for Anhui Anfu Battery Technology Co.,Ltd's (SHSE:603031) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

Check out our latest analysis for Anhui Anfu Battery TechnologyLtd

Zooming In On Anhui Anfu Battery TechnologyLtd'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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to September 2024, Anhui Anfu Battery TechnologyLtd recorded an accrual ratio of -0.15. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of CN¥893m during the period, dwarfing its reported profit of CN¥162.8m. Anhui Anfu Battery TechnologyLtd did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Anhui Anfu Battery TechnologyLtd.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Anhui Anfu Battery TechnologyLtd expanded the number of shares on issue by 30% over the last year. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Anhui Anfu Battery TechnologyLtd's EPS by clicking here.

A Look At The Impact Of Anhui Anfu Battery TechnologyLtd's Dilution On Its Earnings Per Share (EPS)

Anhui Anfu Battery TechnologyLtd was losing money three years ago. The good news is that profit was up 54% in the last twelve months. On the other hand, earnings per share are only up 24% over the same period. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Anhui Anfu Battery TechnologyLtd shareholders will want to see that EPS figure continue to increase. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On Anhui Anfu Battery TechnologyLtd's Profit Performance

In conclusion, Anhui Anfu Battery TechnologyLtd has strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share growth is weaker than its profit growth. Given the contrasting considerations, we don't have a strong view as to whether Anhui Anfu Battery TechnologyLtd'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. While conducting our analysis, we found that Anhui Anfu Battery TechnologyLtd has 2 warning signs and it would be unwise to ignore these.

Our examination of Anhui Anfu Battery TechnologyLtd has focussed on certain factors that can make its earnings look better than they are. 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 with significant insider holdings 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.