Some Investors May Be Willing To Look Past Delixi New Energy Technology's (SHSE:603032) Soft Earnings

Investors were disappointed with the weak earnings posted by Delixi New Energy Technology Co., Ltd. (SHSE:603032 ). However, our analysis suggests that the soft headline numbers are getting counterbalanced by some positive underlying factors.

See our latest analysis for Delixi New Energy Technology

Examining Cashflow Against Delixi New 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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Delixi New Energy Technology has an accrual ratio of -0.25 for the year to December 2023. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of CN¥333m in the last year, which was a lot more than its statutory profit of CN¥107.5m. Delixi New Energy Technology's free cash flow improved over the last year, which is generally good to see.

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

Our Take On Delixi New Energy Technology's Profit Performance

Happily for shareholders, Delixi New Energy Technology produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Delixi New Energy Technology's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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 Delixi New Energy Technology, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for Delixi New Energy Technology (of which 2 can't be ignored!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Delixi New Energy Technology'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.