Jiangsu Newamstar Packaging MachineryLtd's (SZSE:300509) Solid Earnings Are Supported By Other Strong Factors

Jiangsu Newamstar Packaging Machinery Co.,Ltd's (SZSE:300509) stock was strong after they recently reported robust earnings. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

See our latest analysis for Jiangsu Newamstar Packaging MachineryLtd

Zooming In On Jiangsu Newamstar Packaging MachineryLtd'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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2024, Jiangsu Newamstar Packaging MachineryLtd had an accrual ratio of -0.45. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of CN¥192m, well over the CN¥28.1m it reported in profit. Given that Jiangsu Newamstar Packaging MachineryLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥192m would seem to be a step in the right direction. Having said that, there is more to the story. 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 Newamstar Packaging MachineryLtd.

How Do Unusual Items Influence Profit?

Surprisingly, given Jiangsu Newamstar Packaging MachineryLtd's accrual ratio implied strong cash conversion, its paper profit was actually boosted by CN¥9.4m in unusual items. 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. Jiangsu Newamstar Packaging MachineryLtd had a rather significant contribution from unusual items relative to its profit to September 2024. 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 Jiangsu Newamstar Packaging MachineryLtd's Profit Performance

Jiangsu Newamstar Packaging MachineryLtd'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. Given the contrasting considerations, we don't have a strong view as to whether Jiangsu Newamstar Packaging MachineryLtd's profits are an apt reflection of its underlying potential for profit. If you'd like to know more about Jiangsu Newamstar Packaging MachineryLtd as a business, it's important to be aware of any risks it's facing. For instance, we've identified 3 warning signs for Jiangsu Newamstar Packaging MachineryLtd (1 makes us a bit uncomfortable) you should be familiar with.

Our examination of Jiangsu Newamstar Packaging MachineryLtd 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. 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.