Stock Analysis

Weak Statutory Earnings May Not Tell The Whole Story For Jiangsu Tongrun Equipment TechnologyLtd (SZSE:002150)

SZSE:002150
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Jiangsu Tongrun Equipment Technology Co.,Ltd's (SZSE:002150) recent weak earnings report didn't cause a big stock movement. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

Check out our latest analysis for Jiangsu Tongrun Equipment TechnologyLtd

earnings-and-revenue-history
SZSE:002150 Earnings and Revenue History May 1st 2024

Examining Cashflow Against Jiangsu Tongrun Equipment TechnologyLtd's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Jiangsu Tongrun Equipment TechnologyLtd has an accrual ratio of 0.21 for the year to March 2024. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of CN¥65.0m, a look at free cash flow indicates it actually burnt through CN¥244m in the last year. We saw that FCF was CN¥192m a year ago though, so Jiangsu Tongrun Equipment TechnologyLtd has at least been able to generate positive FCF in the past. The good news for shareholders is that Jiangsu Tongrun Equipment TechnologyLtd's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangsu Tongrun Equipment TechnologyLtd.

Our Take On Jiangsu Tongrun Equipment TechnologyLtd's Profit Performance

Jiangsu Tongrun Equipment 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. Because of this, we think that it may be that Jiangsu Tongrun Equipment TechnologyLtd's statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. 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 want to do dive deeper into Jiangsu Tongrun Equipment TechnologyLtd, you'd also look into what risks it is currently facing. To help with this, we've discovered 3 warning signs (2 are a bit unpleasant!) that you ought to be aware of before buying any shares in Jiangsu Tongrun Equipment TechnologyLtd.

This note has only looked at a single factor that sheds light on the nature of Jiangsu Tongrun Equipment TechnologyLtd's 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. 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.