Solid Earnings Reflect Zhang Xiaoquan's (SZSE:301055) Strength As A Business

Zhang Xiaoquan Inc. (SZSE:301055) just reported healthy earnings but the stock price didn't move much. We think that investors have missed some encouraging factors underlying the profit figures.

See our latest analysis for Zhang Xiaoquan

A Closer Look At Zhang Xiaoquan'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. 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. 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.

Zhang Xiaoquan has an accrual ratio of -0.11 for the year to June 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of CN¥83m in the last year, which was a lot more than its statutory profit of CN¥31.0m. Zhang Xiaoquan did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.

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 Zhang Xiaoquan's Profit Performance

Zhang Xiaoquan's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Zhang Xiaoquan's earnings potential is at least as good as it seems, and maybe even better! Furthermore, it has done a great job growing EPS over 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 want to do dive deeper into Zhang Xiaoquan, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 2 warning signs with Zhang Xiaoquan, and understanding these bad boys should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Zhang Xiaoquan's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.

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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.