Zhuzhou Tianqiao Crane's (SZSE:002523) Sluggish Earnings Might Be Just The Beginning Of Its Problems

The latest earnings report from Zhuzhou Tianqiao Crane Co., Ltd. (SZSE:002523 ) disappointed investors. We did some digging and think there are some comforting factors lying beneath the statutory profit numbers.

View our latest analysis for Zhuzhou Tianqiao Crane

Examining Cashflow Against Zhuzhou Tianqiao Crane'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. 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.

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

Zhuzhou Tianqiao Crane has an accrual ratio of -0.14 for the year to December 2023. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of CN¥309m in the last year, which was a lot more than its statutory profit of CN¥37.3m. Zhuzhou Tianqiao Crane's free cash flow improved over the last year, which is generally good to see. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhuzhou Tianqiao Crane.

How Do Unusual Items Influence Profit?

While the accrual ratio might bode well, we also note that Zhuzhou Tianqiao Crane's profit was boosted by unusual items worth CN¥18m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. We can see that Zhuzhou Tianqiao Crane's positive unusual items were quite significant relative to its profit in the year to December 2023. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Zhuzhou Tianqiao Crane's Profit Performance

Zhuzhou Tianqiao Crane's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Having considered these factors, we don't think Zhuzhou Tianqiao Crane's statutory profits give an overly harsh view of the business. If you'd like to know more about Zhuzhou Tianqiao Crane as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for Zhuzhou Tianqiao Crane you should be mindful of and 1 of these bad boys doesn't sit too well with us.

Our examination of Zhuzhou Tianqiao Crane has focussed on certain factors that can make its earnings look better than they are. 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 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.