Suzhou Secote Precision ElectronicLTD (SHSE:603283) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Despite announcing strong earnings, Suzhou Secote Precision Electronic Co.,LTD's (SHSE:603283) stock was sluggish. We did some digging and found some worrying underlying problems.

See our latest analysis for Suzhou Secote Precision ElectronicLTD

A Closer Look At Suzhou Secote Precision ElectronicLTD'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Suzhou Secote Precision ElectronicLTD has an accrual ratio of 0.48 for the year to September 2024. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of CN¥458m, in contrast to the aforementioned profit of CN¥762.6m. It's worth noting that Suzhou Secote Precision ElectronicLTD generated positive FCF of CN¥669m a year ago, so at least they've done it in the past. The good news for shareholders is that Suzhou Secote Precision ElectronicLTD's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. As a result, some shareholders may be looking for stronger cash conversion in the current year.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Suzhou Secote Precision ElectronicLTD's Profit Performance

As we have made quite clear, we're a bit worried that Suzhou Secote Precision ElectronicLTD didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Suzhou Secote Precision ElectronicLTD's underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. If you want to do dive deeper into Suzhou Secote Precision ElectronicLTD, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for Suzhou Secote Precision ElectronicLTD and you'll want to know about this.

Today we've zoomed in on a single data point to better understand the nature of Suzhou Secote Precision ElectronicLTD's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.