Solid Earnings May Not Tell The Whole Story For Zhuzhou Huarui Precision Cutting ToolsLtd (SHSE:688059)

Zhuzhou Huarui Precision Cutting Tools Co.,Ltd.'s (SHSE:688059) healthy profit numbers didn't contain any surprises for investors. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

See our latest analysis for Zhuzhou Huarui Precision Cutting ToolsLtd

A Closer Look At Zhuzhou Huarui Precision Cutting ToolsLtd'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). 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. The ratio shows us how much a company's profit exceeds its FCF.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to March 2024, Zhuzhou Huarui Precision Cutting ToolsLtd recorded an accrual ratio of 0.32. 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. Even though it reported a profit of CN¥151.0m, a look at free cash flow indicates it actually burnt through CN¥315m in the last year. We also note that Zhuzhou Huarui Precision Cutting ToolsLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥315m.

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 Zhuzhou Huarui Precision Cutting ToolsLtd's Profit Performance

As we discussed above, we think Zhuzhou Huarui Precision Cutting ToolsLtd's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Zhuzhou Huarui Precision Cutting ToolsLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that its earnings per share increased slightly in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. 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. Be aware that Zhuzhou Huarui Precision Cutting ToolsLtd is showing 2 warning signs in our investment analysis and 1 of those is concerning...

Today we've zoomed in on a single data point to better understand the nature of Zhuzhou Huarui Precision Cutting ToolsLtd'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 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.