Guangzhou Haoyang ElectronicLtd's (SZSE:300833) Problems Go Beyond Weak Profit

The market wasn't impressed with the soft earnings from Guangzhou Haoyang Electronic Co.,Ltd. (SZSE:300833) recently. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

See our latest analysis for Guangzhou Haoyang ElectronicLtd

A Closer Look At Guangzhou Haoyang ElectronicLtd'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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 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 September 2024, Guangzhou Haoyang ElectronicLtd recorded an accrual ratio of 0.23. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. To wit, it produced free cash flow of CN¥128m during the period, falling well short of its reported profit of CN¥314.0m. Guangzhou Haoyang ElectronicLtd's free cash flow actually declined over the last year, but it may bounce back next year, since free cash flow is often more volatile than accounting profits.

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 Guangzhou Haoyang ElectronicLtd's Profit Performance

Guangzhou Haoyang ElectronicLtd's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that Guangzhou Haoyang ElectronicLtd's statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Guangzhou Haoyang ElectronicLtd at this point in time. For instance, we've identified 2 warning signs for Guangzhou Haoyang ElectronicLtd (1 doesn't sit too well with us) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Guangzhou Haoyang ElectronicLtd'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. 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.