We Think That There Are More Issues For Zhejiang Zoenn Design (SZSE:300901) Than Just Sluggish Earnings

Investors were disappointed by Zhejiang Zoenn Design Co., Ltd.'s (SZSE:300901 ) latest earnings release. Our analysis has found some reasons to be concerned, beyond the weak headline numbers.

View our latest analysis for Zhejiang Zoenn Design

A Closer Look At Zhejiang Zoenn Design's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. 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 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Zhejiang Zoenn Design has an accrual ratio of 0.33 for the year to December 2023. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Over the last year it actually had negative free cash flow of CN¥163m, in contrast to the aforementioned profit of CN¥21.3m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥163m, this year, indicates high risk.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhejiang Zoenn Design.

Our Take On Zhejiang Zoenn Design's Profit Performance

As we discussed above, we think Zhejiang Zoenn Design's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Zhejiang Zoenn Design's underlying earnings power is lower than its statutory profit. Sadly, its EPS was down over the last twelve months. 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. If you'd like to know more about Zhejiang Zoenn Design as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 5 warning signs we've spotted with Zhejiang Zoenn Design (including 3 which make us uncomfortable).

This note has only looked at a single factor that sheds light on the nature of Zhejiang Zoenn Design's profit. 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. 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.