Some Investors May Be Willing To Look Past Tianjin Guoan Mengguli New Materials Science & Technology's (SZSE:301487) Soft Earnings

Tianjin Guoan Mengguli New Materials Science & Technology Co., Ltd.'s (SZSE:301487) stock was strong despite it releasing a soft earnings report last week. However, we think the company is showing some signs that things are more promising than they seem.

View our latest analysis for Tianjin Guoan Mengguli New Materials Science & Technology

Examining Cashflow Against Tianjin Guoan Mengguli New Materials Science & 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'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to March 2024, Tianjin Guoan Mengguli New Materials Science & Technology had an accrual ratio of -0.11. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of CN¥237m, well over the CN¥48.9m it reported in profit. Notably, Tianjin Guoan Mengguli New Materials Science & Technology had negative free cash flow last year, so the CN¥237m it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Tianjin Guoan Mengguli New Materials Science & Technology.

Our Take On Tianjin Guoan Mengguli New Materials Science & Technology's Profit Performance

Tianjin Guoan Mengguli New Materials Science & Technology's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Tianjin Guoan Mengguli New Materials Science & Technology's earnings potential is at least as good as it seems, and maybe even better! On the other hand, its EPS actually shrunk in the last twelve months. 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. If you'd like to know more about Tianjin Guoan Mengguli New Materials Science & Technology as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Tianjin Guoan Mengguli New Materials Science & Technology, and understanding this should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Tianjin Guoan Mengguli New Materials Science & Technology's profit. 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 that insiders are buying 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.