Solid Earnings May Not Tell The Whole Story For Wuhan Yifi Laser (SHSE:688646)

Wuhan Yifi Laser Corporation Limited's (SHSE:688646) healthy profit numbers didn't contain any surprises for investors. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

See our latest analysis for Wuhan Yifi Laser

Examining Cashflow Against Wuhan Yifi Laser'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. 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to March 2024, Wuhan Yifi Laser had an accrual ratio of 0.39. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥143m despite its profit of CN¥108.3m, mentioned above. We also note that Wuhan Yifi Laser's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥143m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Wuhan Yifi Laser.

Our Take On Wuhan Yifi Laser's Profit Performance

As we discussed above, we think Wuhan Yifi Laser's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Wuhan Yifi Laser's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the good news is that its EPS growth over the last three years has been very impressive. 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. If you'd like to know more about Wuhan Yifi Laser as a business, it's important to be aware of any risks it's facing. For instance, we've identified 2 warning signs for Wuhan Yifi Laser (1 is concerning) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Wuhan Yifi Laser's profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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.