Jiangsu Xiechang Electronic Technology Group's (SZSE:301418) Sluggish Earnings Might Be Just The Beginning Of Its Problems

Jiangsu Xiechang Electronic Technology Group Co., Ltd.'s (SZSE:301418) recent weak earnings report didn't cause a big stock movement. We think that investors are worried about some weaknesses underlying the earnings.

View our latest analysis for Jiangsu Xiechang Electronic Technology Group

Zooming In On Jiangsu Xiechang Electronic Technology Group'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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, Jiangsu Xiechang Electronic Technology Group recorded an accrual ratio of -0.14. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of CN¥80m during the period, dwarfing its reported profit of CN¥46.2m. Jiangsu Xiechang Electronic Technology Group's free cash flow improved over the last year, which is generally good to see. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangsu Xiechang Electronic Technology Group.

How Do Unusual Items Influence Profit?

While the accrual ratio might bode well, we also note that Jiangsu Xiechang Electronic Technology Group's profit was boosted by unusual items worth CN¥8.6m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Jiangsu Xiechang Electronic Technology Group's positive unusual items were quite significant relative to its profit in the year to September 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Jiangsu Xiechang Electronic Technology Group's Profit Performance

Jiangsu Xiechang Electronic Technology Group's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Having considered these factors, we don't think Jiangsu Xiechang Electronic Technology Group's statutory profits give an overly harsh view of the business. If you want to do dive deeper into Jiangsu Xiechang Electronic Technology Group, you'd also look into what risks it is currently facing. To that end, you should learn about the 2 warning signs we've spotted with Jiangsu Xiechang Electronic Technology Group (including 1 which shouldn't be ignored).

Our examination of Jiangsu Xiechang Electronic Technology Group has focussed on certain factors that can make its earnings look better than they are. 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.