Noblelift Intelligent EquipmentLtd's (SHSE:603611) Sluggish Earnings Might Be Just The Beginning Of Its Problems

Noblelift Intelligent Equipment Co.,Ltd.'s (SHSE:603611) recent weak earnings report didn't cause a big stock movement. We think that investors are worried about some weaknesses underlying the earnings.

See our latest analysis for Noblelift Intelligent EquipmentLtd

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

Noblelift Intelligent EquipmentLtd has an accrual ratio of 0.33 for the year to September 2024. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Over the last year it actually had negative free cash flow of CN¥439m, in contrast to the aforementioned profit of CN¥461.5m. It's worth noting that Noblelift Intelligent EquipmentLtd generated positive FCF of CN¥430m a year ago, so at least they've done it in the past.

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 Noblelift Intelligent EquipmentLtd's Profit Performance

As we have made quite clear, we're a bit worried that Noblelift 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 Noblelift Intelligent EquipmentLtd'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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For instance, we've identified 2 warning signs for Noblelift Intelligent EquipmentLtd (1 is potentially serious) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Noblelift Intelligent EquipmentLtd'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 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.