Jiiangsu Times Textile TechnologyLTD's (SZSE:001234) Shareholders May Want To Dig Deeper Than Statutory Profit

The market for Jiiangsu Times Textile Technology Co.,LTD's (SZSE:001234) stock was strong after it released a healthy earnings report last week. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.

View our latest analysis for Jiiangsu Times Textile TechnologyLTD

Zooming In On Jiiangsu Times Textile TechnologyLTD's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. 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. 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 March 2024, Jiiangsu Times Textile TechnologyLTD recorded an accrual ratio of 0.22. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥30m despite its profit of CN¥80.8m, mentioned above. We saw that FCF was CN¥26m a year ago though, so Jiiangsu Times Textile TechnologyLTD has at least been able to generate positive FCF in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiiangsu Times Textile TechnologyLTD.

Our Take On Jiiangsu Times Textile TechnologyLTD's Profit Performance

Jiiangsu Times Textile TechnologyLTD's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Therefore, it seems possible to us that Jiiangsu Times Textile TechnologyLTD's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 21% EPS growth 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. So while earnings quality is important, it's equally important to consider the risks facing Jiiangsu Times Textile TechnologyLTD at this point in time. For example, we've discovered 3 warning signs that you should run your eye over to get a better picture of Jiiangsu Times Textile TechnologyLTD.

Today we've zoomed in on a single data point to better understand the nature of Jiiangsu Times Textile TechnologyLTD'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.