Impressive Earnings May Not Tell The Whole Story For Zhejiang grandwall electric science&technologyltd (SHSE:603897)

Unsurprisingly, Zhejiang grandwall electric science&technology co.,ltd.'s (SHSE:603897) stock price was strong on the back of its healthy earnings report. However, we think that shareholders may be missing some concerning details in the numbers.

Check out our latest analysis for Zhejiang grandwall electric science&technologyltd

Zooming In On Zhejiang grandwall electric science&technologyltd'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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.

Zhejiang grandwall electric science&technologyltd has an accrual ratio of 0.27 for the year to September 2024. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of CN¥296.2m, a look at free cash flow indicates it actually burnt through CN¥193m in the last year. We also note that Zhejiang grandwall electric science&technologyltd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥193m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhejiang grandwall electric science&technologyltd.

Our Take On Zhejiang grandwall electric science&technologyltd's Profit Performance

Zhejiang grandwall electric science&technologyltd didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Zhejiang grandwall electric science&technologyltd's true underlying earnings power is actually less than its statutory profit. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over the last year. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. At Simply Wall St, we found 2 warning signs for Zhejiang grandwall electric science&technologyltd and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Zhejiang grandwall electric science&technologyltd'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.