Qingdao Paguld Intelligent ManufacturingLtd's (SZSE:301456) Shareholders Have More To Worry About Than Only Soft Earnings

Last week's earnings announcement from Qingdao Paguld Intelligent Manufacturing Co.,Ltd. (SZSE:301456) was disappointing to investors, with a sluggish profit figure. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

See our latest analysis for Qingdao Paguld Intelligent ManufacturingLtd

A Closer Look At Qingdao Paguld Intelligent ManufacturingLtd'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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to September 2024, Qingdao Paguld Intelligent ManufacturingLtd recorded an accrual ratio of 0.25. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of CN¥91m, in contrast to the aforementioned profit of CN¥90.4m. We also note that Qingdao Paguld Intelligent ManufacturingLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥91m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Qingdao Paguld Intelligent ManufacturingLtd.

Our Take On Qingdao Paguld Intelligent ManufacturingLtd's Profit Performance

Qingdao Paguld Intelligent ManufacturingLtd didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Qingdao Paguld Intelligent ManufacturingLtd's true underlying earnings power is actually less than its statutory profit. In further bad news, its earnings per share decreased in 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Be aware that Qingdao Paguld Intelligent ManufacturingLtd is showing 3 warning signs in our investment analysis and 2 of those can't be ignored...

This note has only looked at a single factor that sheds light on the nature of Qingdao Paguld Intelligent ManufacturingLtd'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 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.