We Think You Can Look Beyond Wuxi Hongsheng Heat Exchanger Manufacturing's (SHSE:603090) Lackluster Earnings

Shareholders appeared unconcerned with Wuxi Hongsheng Heat Exchanger Manufacturing Co., Ltd.'s (SHSE:603090) lackluster earnings report last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

View our latest analysis for Wuxi Hongsheng Heat Exchanger Manufacturing

Zooming In On Wuxi Hongsheng Heat Exchanger Manufacturing'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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Wuxi Hongsheng Heat Exchanger Manufacturing has an accrual ratio of -0.12 for the year to September 2024. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of CN¥111m during the period, dwarfing its reported profit of CN¥44.7m. Wuxi Hongsheng Heat Exchanger Manufacturing'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 Wuxi Hongsheng Heat Exchanger Manufacturing.

Our Take On Wuxi Hongsheng Heat Exchanger Manufacturing's Profit Performance

As we discussed above, Wuxi Hongsheng Heat Exchanger Manufacturing has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Wuxi Hongsheng Heat Exchanger Manufacturing's statutory profit actually understates its earnings potential! 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. While conducting our analysis, we found that Wuxi Hongsheng Heat Exchanger Manufacturing has 2 warning signs and it would be unwise to ignore these.

Today we've zoomed in on a single data point to better understand the nature of Wuxi Hongsheng Heat Exchanger Manufacturing's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.