Rongcheer Industrial Technology (Suzhou)'s (SZSE:301360) Anemic Earnings Might Be Worse Than You Think

Despite Rongcheer Industrial Technology (Suzhou) Co., Ltd.'s (SZSE:301360) recent earnings report having lackluster headline numbers, the market responded positively. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Rongcheer Industrial Technology (Suzhou).

Check out our latest analysis for Rongcheer Industrial Technology (Suzhou)

A Closer Look At Rongcheer Industrial Technology (Suzhou)'s Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. 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, Rongcheer Industrial Technology (Suzhou) recorded an accrual ratio of 0.56. As a general rule, that bodes poorly for future profitability. 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¥99m, in contrast to the aforementioned profit of CN¥45.7m. It's worth noting that Rongcheer Industrial Technology (Suzhou) generated positive FCF of CN¥35m a year ago, so at least they've done it in the past.

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 Rongcheer Industrial Technology (Suzhou)'s Profit Performance

As we have made quite clear, we're a bit worried that Rongcheer Industrial Technology (Suzhou) didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Rongcheer Industrial Technology (Suzhou)'s underlying earnings power is lower than its statutory profit. Sadly, its EPS was down over the last twelve months. 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. So while earnings quality is important, it's equally important to consider the risks facing Rongcheer Industrial Technology (Suzhou) at this point in time. Every company has risks, and we've spotted 2 warning signs for Rongcheer Industrial Technology (Suzhou) (of which 1 is a bit concerning!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Rongcheer Industrial Technology (Suzhou)'s profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.