We Think Hangzhou Fortune Gas Cryogenic Group's (SHSE:603173) Profit Is Only A Baseline For What They Can Achieve

Hangzhou Fortune Gas Cryogenic Group Co., Ltd. (SHSE:603173) recently posted some strong earnings, and the market responded positively. Our analysis found some more factors that we think are good for shareholders.

See our latest analysis for Hangzhou Fortune Gas Cryogenic Group

A Closer Look At Hangzhou Fortune Gas Cryogenic Group'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). 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'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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.

For the year to September 2024, Hangzhou Fortune Gas Cryogenic Group had an accrual ratio of -0.18. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CN¥324m in the last year, which was a lot more than its statutory profit of CN¥255.4m. Hangzhou Fortune Gas Cryogenic Group shareholders are no doubt pleased that free cash flow improved over the last twelve months. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hangzhou Fortune Gas Cryogenic Group.

The Impact Of Unusual Items On Profit

While the accrual ratio might bode well, we also note that Hangzhou Fortune Gas Cryogenic Group's profit was boosted by unusual items worth CN¥29m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Hangzhou Fortune Gas Cryogenic Group's Profit Performance

In conclusion, Hangzhou Fortune Gas Cryogenic Group's accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Based on these factors, we think that Hangzhou Fortune Gas Cryogenic Group's profits are a reasonably conservative guide to its underlying profitability. If you want to do dive deeper into Hangzhou Fortune Gas Cryogenic Group, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for Hangzhou Fortune Gas Cryogenic Group and you'll want to know about this.

Our examination of Hangzhou Fortune Gas Cryogenic Group 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. 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.