Why Jiangsu Tongda Power TechnologyLtd's (SZSE:002576) Earnings Are Better Than They Seem

Jiangsu Tongda Power Technology Co.,Ltd.'s (SZSE:002576) recent earnings report didn't offer any surprises, with the shares unchanged over the last week. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.

Check out our latest analysis for Jiangsu Tongda Power TechnologyLtd

Examining Cashflow Against Jiangsu Tongda Power TechnologyLtd'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 December 2023, Jiangsu Tongda Power TechnologyLtd recorded an accrual ratio of -0.22. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of CN¥306m in the last year, which was a lot more than its statutory profit of CN¥88.0m. Notably, Jiangsu Tongda Power TechnologyLtd had negative free cash flow last year, so the CN¥306m it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangsu Tongda Power TechnologyLtd.

Our Take On Jiangsu Tongda Power TechnologyLtd's Profit Performance

As we discussed above, Jiangsu Tongda Power TechnologyLtd's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Jiangsu Tongda Power TechnologyLtd's statutory profit actually understates its earnings potential! And the EPS is up 29% 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. Just as investors must consider earnings, it is also important to take into account the strength of a company's balance sheet. You can see our latest analysis on Jiangsu Tongda Power TechnologyLtd's balance sheet health here.

This note has only looked at a single factor that sheds light on the nature of Jiangsu Tongda Power TechnologyLtd'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 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.