Wenzhou Yuanfei pet toy products' (SZSE:001222) Solid Earnings May Rest On Weak Foundations

The recent earnings posted by Wenzhou Yuanfei pet toy products Co., Ltd. (SZSE:001222) were solid, but the stock didn't move as much as we expected. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

See our latest analysis for Wenzhou Yuanfei pet toy products

Examining Cashflow Against 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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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.

For the year to March 2024, Wenzhou Yuanfei pet toy products had an accrual ratio of 0.23. 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¥141.5m, a look at free cash flow indicates it actually burnt through CN¥6.6m in the last year. We saw that FCF was CN¥49m a year ago though, so Wenzhou Yuanfei pet toy products has at least been able to generate positive FCF 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 slightly in the last year. 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 Wenzhou Yuanfei pet toy products as a business, it's important to be aware of any risks it's facing. For instance, we've identified 2 warning signs for Wenzhou Yuanfei pet toy products (1 is significant) you should be familiar with.

Today we've zoomed in on a single data point to better understand 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 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.