Investors Shouldn't Be Too Comfortable With Wuxi Delinhai Environmental TechnologyLtd's (SHSE:688069) Earnings

Wuxi Delinhai Environmental Technology Co.,Ltd's (SHSE:688069) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

Check out our latest analysis for Wuxi Delinhai Environmental TechnologyLtd

Examining Cashflow Against Wuxi Delinhai Environmental TechnologyLtd'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. 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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. 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 June 2024, Wuxi Delinhai Environmental TechnologyLtd recorded an accrual ratio of -0.11. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of CN¥95m in the last year, which was a lot more than its statutory profit of CN¥17.2m. Wuxi Delinhai Environmental TechnologyLtd shareholders are no doubt pleased that free cash flow improved over the last twelve months. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Wuxi Delinhai Environmental TechnologyLtd.

How Do Unusual Items Influence Profit?

While the accrual ratio might bode well, we also note that Wuxi Delinhai Environmental TechnologyLtd's profit was boosted by unusual items worth CN¥13m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. And that's as you'd expect, given these boosts are described as 'unusual'. Wuxi Delinhai Environmental TechnologyLtd had a rather significant contribution from unusual items relative to its profit to June 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 Wuxi Delinhai Environmental TechnologyLtd's Profit Performance

Wuxi Delinhai Environmental TechnologyLtd'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 Wuxi Delinhai Environmental TechnologyLtd's statutory profits give an overly harsh view of the business. If you'd like to know more about Wuxi Delinhai Environmental TechnologyLtd as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 2 warning signs we've spotted with Wuxi Delinhai Environmental TechnologyLtd (including 1 which is significant).

Our examination of Wuxi Delinhai Environmental TechnologyLtd has focussed on certain factors that can make its earnings look better than they are. But there are plenty of other ways to inform your opinion of a company. 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.