We Think Suzhou Hailu Heavy IndustryLtd's (SZSE:002255) Healthy Earnings Might Be Conservative

Suzhou Hailu Heavy Industry Co.,Ltd's (SZSE:002255) solid earnings announcement recently didn't do much to the stock price. We did some analysis to find out why and believe that investors might be missing some encouraging factors contained in the earnings.

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A Closer Look At Suzhou Hailu Heavy IndustryLtd'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. 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to December 2024, Suzhou Hailu Heavy IndustryLtd recorded an accrual ratio of -0.11. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. Indeed, in the last twelve months it reported free cash flow of CN¥635m, well over the CN¥377.2m it reported in profit. Suzhou Hailu Heavy IndustryLtd's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Suzhou Hailu Heavy IndustryLtd.

Our Take On Suzhou Hailu Heavy IndustryLtd's Profit Performance

As we discussed above, Suzhou Hailu Heavy IndustryLtd has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Suzhou Hailu Heavy IndustryLtd's statutory profit actually understates its earnings potential! And the EPS is up 15% annually, over the last three years. 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. While earnings are important, another area to consider is the balance sheet. We've done some analysis and you can see our take on Suzhou Hailu Heavy IndustryLtd's balance sheet by clicking here.

Today we've zoomed in on a single data point to better understand the nature of Suzhou Hailu Heavy IndustryLtd'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. 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.