We Think You Should Be Aware Of Some Concerning Factors In Zhejiang Wandekai Fluid Equipment Technology's (SZSE:301309) Earnings

The market for Zhejiang Wandekai Fluid Equipment Technology Co., Ltd.'s (SZSE:301309) stock was strong after it released a healthy earnings report last week. While the profit numbers were good, our analysis has found some concerning factors that shareholders should be aware of.

Check out our latest analysis for Zhejiang Wandekai Fluid Equipment Technology

A Closer Look At Zhejiang Wandekai Fluid Equipment Technology's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Zhejiang Wandekai Fluid Equipment Technology has an accrual ratio of 0.49 for the year to March 2024. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥218m despite its profit of CN¥130.1m, mentioned above. We saw that FCF was CN¥163m a year ago though, so Zhejiang Wandekai Fluid Equipment Technology has at least been able to generate positive FCF in the past. The good news for shareholders is that Zhejiang Wandekai Fluid Equipment Technology's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhejiang Wandekai Fluid Equipment Technology.

Our Take On Zhejiang Wandekai Fluid Equipment Technology's Profit Performance

As we have made quite clear, we're a bit worried that Zhejiang Wandekai Fluid Equipment Technology didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Zhejiang Wandekai Fluid Equipment Technology's underlying earnings power is lower than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 23% 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Be aware that Zhejiang Wandekai Fluid Equipment Technology is showing 2 warning signs in our investment analysis and 1 of those is significant...

This note has only looked at a single factor that sheds light on the nature of Zhejiang Wandekai Fluid Equipment 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.