ShenZhen QiangRui Precision Technology's (SZSE:301128) Earnings Are Weaker Than They Seem

Despite announcing strong earnings, ShenZhen QiangRui Precision Technology Co., Ltd.'s (SZSE:301128) stock was sluggish. Our analysis uncovered some concerning factors that we believe the market might be paying attention to.

View our latest analysis for ShenZhen QiangRui Precision Technology

Examining Cashflow Against ShenZhen QiangRui Precision 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). 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.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

ShenZhen QiangRui Precision Technology has an accrual ratio of 0.20 for the year to September 2024. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of CN¥94.7m, a look at free cash flow indicates it actually burnt through CN¥19m in the last year. We also note that ShenZhen QiangRui Precision Technology's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥19m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of ShenZhen QiangRui Precision Technology.

Our Take On ShenZhen QiangRui Precision Technology's Profit Performance

ShenZhen QiangRui Precision Technology didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that ShenZhen QiangRui Precision Technology's statutory profits are better than its underlying earnings power. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over the last year. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For instance, we've identified 3 warning signs for ShenZhen QiangRui Precision Technology (1 is a bit unpleasant) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of ShenZhen QiangRui Precision Technology'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.