Jiangsu Maixinlin Aviation Science and Technology's (SHSE:688685) Anemic Earnings Might Be Worse Than You Think

Despite Jiangsu Maixinlin Aviation Science and Technology Corp.'s (SHSE:688685) most recent earnings report having soft headline numbers, its stock has had a positive performance. We looked at the details, and we think that investors may be responding to some encouraging factors.

View our latest analysis for Jiangsu Maixinlin Aviation Science and Technology

Zooming In On Jiangsu Maixinlin Aviation Science and Technology'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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

Jiangsu Maixinlin Aviation Science and Technology has an accrual ratio of 0.81 for the year to March 2024. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥648m despite its profit of CN¥15.9m, mentioned above. We saw that FCF was CN¥233k a year ago though, so Jiangsu Maixinlin Aviation Science and Technology has at least been able to generate positive FCF in the past. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangsu Maixinlin Aviation Science and Technology.

The Impact Of Unusual Items On Profit

Jiangsu Maixinlin Aviation Science and Technology's profit suffered from unusual items, which reduced profit by CN¥5.8m in the last twelve months. In the case where this was a non-cash charge it would have made it easier to have high cash conversion, so it's surprising that the accrual ratio tells a different story. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Jiangsu Maixinlin Aviation Science and Technology to produce a higher profit next year, all else being equal.

Our Take On Jiangsu Maixinlin Aviation Science and Technology's Profit Performance

Jiangsu Maixinlin Aviation Science and Technology saw unusual items weigh on its profit, which should have made it easier to show high cash conversion, which it did not do, according to its accrual ratio. Based on these factors, we think it's very unlikely that Jiangsu Maixinlin Aviation Science and Technology's statutory profits make it seem much weaker than it is. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 6 warning signs for Jiangsu Maixinlin Aviation Science and Technology you should be mindful of and 5 of them don't sit too well with us.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.