Jiangsu Hanvo Safety Product's (SZSE:300952) Shareholders Have More To Worry About Than Only Soft Earnings

The market wasn't impressed with the soft earnings from Jiangsu Hanvo Safety Product Co., Ltd. (SZSE:300952) recently. Our analysis has found some reasons to be concerned, beyond the weak headline numbers.

View our latest analysis for Jiangsu Hanvo Safety Product

A Closer Look At Jiangsu Hanvo Safety Product'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). 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. The ratio shows us how much a company's profit exceeds its FCF.

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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Jiangsu Hanvo Safety Product has an accrual ratio of 0.23 for the year to March 2024. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Even though it reported a profit of CN¥115.5m, a look at free cash flow indicates it actually burnt through CN¥159m in the last year. We also note that Jiangsu Hanvo Safety Product's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥159m. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

The Impact Of Unusual Items On Profit

Given the accrual ratio, it's not overly surprising that Jiangsu Hanvo Safety Product's profit was boosted by unusual items worth CN¥32m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Jiangsu Hanvo Safety Product's positive unusual items were quite significant relative to its profit in the year to March 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Jiangsu Hanvo Safety Product's Profit Performance

Jiangsu Hanvo Safety Product had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Jiangsu Hanvo Safety Product's profits probably give an overly generous impression of its sustainable level of profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Our analysis shows 2 warning signs for Jiangsu Hanvo Safety Product (1 is potentially serious!) and we strongly recommend you look at them before investing.

Our examination of Jiangsu Hanvo Safety Product 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com