Shandong Tengda Fasten Tech's (SZSE:001379) Sluggish Earnings Might Be Just The Beginning Of Its Problems

Shandong Tengda Fasten Tech. Co., Ltd.'s (SZSE:001379) stock showed strength, with investors undeterred by its weak earnings report. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Shandong Tengda Fasten Tech.

See our latest analysis for Shandong Tengda Fasten Tech

A Closer Look At Shandong Tengda Fasten Tech'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. 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.

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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. 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 September 2024, Shandong Tengda Fasten Tech recorded an accrual ratio of 0.51. 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. Even though it reported a profit of CN¥68.5m, a look at free cash flow indicates it actually burnt through CN¥171m in the last year. We saw that FCF was CN¥102m a year ago though, so Shandong Tengda Fasten Tech has at least been able to generate positive FCF in the past. One positive for Shandong Tengda Fasten Tech shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shandong Tengda Fasten Tech.

Our Take On Shandong Tengda Fasten Tech's Profit Performance

As we discussed above, we think Shandong Tengda Fasten Tech's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Shandong Tengda Fasten Tech's underlying earnings power is lower than its statutory profit. Sadly, its EPS was down over the last twelve months. 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. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Shandong Tengda Fasten Tech.

This note has only looked at a single factor that sheds light on the nature of Shandong Tengda Fasten Tech'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.