Stock Analysis

Tianjin Guoan Mengguli New Materials Science & Technology's (SZSE:301487) Weak Earnings May Only Reveal A Part Of The Whole Picture

SZSE:301487
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Investors weren't pleased with the recent soft earnings report from Tianjin Guoan Mengguli New Materials Science & Technology Co., Ltd. (SZSE:301487). We did some digging and believe that things are better than they seem due to some encouraging factors.

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

earnings-and-revenue-history
SZSE:301487 Earnings and Revenue History November 4th 2024

A Closer Look At Tianjin Guoan Mengguli New Materials Science & Technology'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.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2024, Tianjin Guoan Mengguli New Materials Science & Technology had an accrual ratio of -0.17. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of CN¥390m during the period, dwarfing its reported profit of CN¥8.88m. Given that Tianjin Guoan Mengguli New Materials Science & Technology had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥390m would seem to be a step in the right direction. However, we can see that a recent tax benefit, along with unusual items, have impacted its statutory profit, and therefore its accrual ratio.

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.

The Impact Of Unusual Items On Profit

While the accrual ratio might bode well, we also note that Tianjin Guoan Mengguli New Materials Science & Technology's profit was boosted by unusual items worth CN¥24m 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 crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. Tianjin Guoan Mengguli New Materials Science & Technology had a rather significant contribution from unusual items relative to its profit 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.

An Unusual Tax Situation

Moving on from the accrual ratio, we note that Tianjin Guoan Mengguli New Materials Science & Technology profited from a tax benefit which contributed CN¥3.3m to profit. This is meaningful because companies usually pay tax rather than receive tax benefits. We're sure the company was pleased with its tax benefit. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.

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

Summing up, Tianjin Guoan Mengguli New Materials Science & Technology's accrual ratio suggests that its statutory earnings are well matched by free cash flow while its unusual items and tax benefit is boosted profit in a way that may not be sustained. Considering all this we'd argue Tianjin Guoan Mengguli New Materials Science & Technology's profits probably give an overly generous impression of its sustainable level of profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, Tianjin Guoan Mengguli New Materials Science & Technology has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

Our examination of Tianjin Guoan Mengguli New Materials Science & Technology 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.