There Are Some Holes In Wuxi Xinhongye Wire & Cable's (SZSE:301310) Solid Earnings Release

Solid profit numbers didn't seem to be enough to please Wuxi Xinhongye Wire & Cable Co., Ltd.'s (SZSE:301310) shareholders. Our analysis has found some concerning factors which weaken the profit's foundation.

See our latest analysis for Wuxi Xinhongye Wire & Cable

Zooming In On Wuxi Xinhongye Wire & Cable'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. 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Wuxi Xinhongye Wire & Cable has an accrual ratio of 0.65 for the year to June 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. Over the last year it actually had negative free cash flow of CN¥467m, in contrast to the aforementioned profit of CN¥155.9m. It's worth noting that Wuxi Xinhongye Wire & Cable generated positive FCF of CN¥177m a year ago, so at least they've done it in the past. 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. One positive for Wuxi Xinhongye Wire & Cable shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Wuxi Xinhongye Wire & Cable's profit was boosted by unusual items worth CN¥36m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Wuxi Xinhongye Wire & Cable's positive unusual items were quite significant relative to its profit in the year to June 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Wuxi Xinhongye Wire & Cable's Profit Performance

Summing up, Wuxi Xinhongye Wire & Cable received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue Wuxi Xinhongye Wire & Cable's profits probably give an overly generous impression of its sustainable level of profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. When we did our research, we found 3 warning signs for Wuxi Xinhongye Wire & Cable (1 is a bit concerning!) that we believe deserve your full attention.

Our examination of Wuxi Xinhongye Wire & Cable has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.