Contemporary Amperex Technology (SZSE:300750) Is Posting Promising Earnings But The Good News Doesn’t Stop There

Contemporary Amperex Technology Co., Limited's (SZSE:300750) solid earnings announcement recently didn't do much to the stock price. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.

See our latest analysis for Contemporary Amperex Technology

A Closer Look At Contemporary Amperex Technology's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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 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 March 2024, Contemporary Amperex Technology recorded an accrual ratio of -0.28. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CN¥70b in the last year, which was a lot more than its statutory profit of CN¥44.8b. Contemporary Amperex Technology shareholders are no doubt pleased that free cash flow improved over the last twelve months.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Contemporary Amperex Technology's Profit Performance

Happily for shareholders, Contemporary Amperex Technology produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Contemporary Amperex Technology's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. 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. If you'd like to know more about Contemporary Amperex Technology as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Contemporary Amperex Technology, and understanding this should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Contemporary Amperex Technology's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.