We Think That There Are More Issues For Zhejiang Dayuan Pumps Industry (SHSE:603757) Than Just Sluggish Earnings

The market wasn't impressed with the soft earnings from Zhejiang Dayuan Pumps Industry Co., Ltd (SHSE:603757) recently. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

Check out our latest analysis for Zhejiang Dayuan Pumps Industry

Zooming In On Zhejiang Dayuan Pumps Industry's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Zhejiang Dayuan Pumps Industry has an accrual ratio of 0.27 for the year to March 2024. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of CN¥35m, in contrast to the aforementioned profit of CN¥266.0m. It's worth noting that Zhejiang Dayuan Pumps Industry generated positive FCF of CN¥135m 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 Zhejiang Dayuan Pumps Industry's Profit Performance

Zhejiang Dayuan Pumps Industry's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that Zhejiang Dayuan Pumps Industry's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 18% per annum growth in EPS for the last three. 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. If you'd like to know more about Zhejiang Dayuan Pumps Industry as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for Zhejiang Dayuan Pumps Industry you should be mindful of and 1 of these is a bit concerning.

This note has only looked at a single factor that sheds light on the nature of Zhejiang Dayuan Pumps Industry'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 that insiders are buying.

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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.