Wenzhou Yuanfei pet toy products' (SZSE:001222) Profits Appear To Have Quality Issues

The stock price didn't jump after Wenzhou Yuanfei pet toy products Co., Ltd. (SZSE:001222) posted decent earnings last week. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

View our latest analysis for Wenzhou Yuanfei pet toy products

Zooming In On Wenzhou Yuanfei pet toy products' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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.

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

Wenzhou Yuanfei pet toy products has an accrual ratio of 0.27 for the year to September 2024. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of CN¥71m, in contrast to the aforementioned profit of CN¥141.5m. It's worth noting that Wenzhou Yuanfei pet toy products generated positive FCF of CN¥17m a year ago, so at least they've done it in the past.

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 Wenzhou Yuanfei pet toy products' Profit Performance

Wenzhou Yuanfei pet toy products didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Wenzhou Yuanfei pet toy products' true underlying earnings power is actually less than its statutory profit. The good news is that, its earnings per share increased by 14% in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Wenzhou Yuanfei pet toy products 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 Wenzhou Yuanfei pet toy products (including 1 which shouldn't be ignored).

This note has only looked at a single factor that sheds light on the nature of Wenzhou Yuanfei pet toy products' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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 with significant insider holdings to be useful.

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

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.