Wuhu Fuchun Dye and WeaveLtd's (SHSE:605189) Anemic Earnings Might Be Worse Than You Think

Wuhu Fuchun Dye and Weave Co.,Ltd.'s (SHSE:605189) recent weak earnings report didn't cause a big stock movement. However, we believe that investors should be aware of some underlying factors which may be of concern.

View our latest analysis for Wuhu Fuchun Dye and WeaveLtd

A Closer Look At Wuhu Fuchun Dye and WeaveLtd'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. 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'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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 December 2023, Wuhu Fuchun Dye and WeaveLtd recorded an accrual ratio of 0.41. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of CN¥611m, in contrast to the aforementioned profit of CN¥104.4m. We also note that Wuhu Fuchun Dye and WeaveLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥611m.

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.

Our Take On Wuhu Fuchun Dye and WeaveLtd's Profit Performance

As we discussed above, we think Wuhu Fuchun Dye and WeaveLtd'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 Wuhu Fuchun Dye and WeaveLtd's underlying earnings power is lower than its statutory profit. Sadly, its EPS was down over the last twelve months. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Wuhu Fuchun Dye and WeaveLtd at this point in time. Case in point: We've spotted 3 warning signs for Wuhu Fuchun Dye and WeaveLtd you should be mindful of and 1 of them shouldn't be ignored.

This note has only looked at a single factor that sheds light on the nature of Wuhu Fuchun Dye and WeaveLtd'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.