Why Jiangsu Teeyer Intelligent EquipmentLtd's (SHSE:603273) Shaky Earnings Are Just The Beginning Of Its Problems

The subdued market reaction suggests that Jiangsu Teeyer Intelligent Equipment Co.,Ltd.'s (SHSE:603273) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.

View our latest analysis for Jiangsu Teeyer Intelligent EquipmentLtd

Zooming In On Jiangsu Teeyer Intelligent EquipmentLtd'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. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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 March 2024, Jiangsu Teeyer Intelligent EquipmentLtd recorded an accrual ratio of 1.53. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of CN¥37m, in contrast to the aforementioned profit of CN¥57.5m. We saw that FCF was CN¥111m a year ago though, so Jiangsu Teeyer Intelligent EquipmentLtd has at least been able to generate positive FCF in the past. One positive for Jiangsu Teeyer Intelligent EquipmentLtd shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangsu Teeyer Intelligent EquipmentLtd.

Our Take On Jiangsu Teeyer Intelligent EquipmentLtd's Profit Performance

As we have made quite clear, we're a bit worried that Jiangsu Teeyer Intelligent EquipmentLtd didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Jiangsu Teeyer Intelligent EquipmentLtd's underlying earnings power is lower than its statutory profit. Sadly, its EPS was down over the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Jiangsu Teeyer Intelligent EquipmentLtd at this point in time. For example, Jiangsu Teeyer Intelligent EquipmentLtd has 2 warning signs (and 1 which can't be ignored) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of Jiangsu Teeyer Intelligent EquipmentLtd'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 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.