Zhejiang Yayi Metal TechnologyLtd's (SZSE:301113) Sluggish Earnings Might Be Just The Beginning Of Its Problems

The market shrugged off Zhejiang Yayi Metal Technology Co.,Ltd's (SZSE:301113) weak earnings report last week. We did some analysis and found some positive factors that investors might be paying attention to rather than profit.

Check out our latest analysis for Zhejiang Yayi Metal TechnologyLtd

A Closer Look At Zhejiang Yayi Metal 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to March 2024, Zhejiang Yayi Metal TechnologyLtd recorded an accrual ratio of 0.29. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Over the last year it actually had negative free cash flow of CN¥85m, in contrast to the aforementioned profit of CN¥17.6m. We also note that Zhejiang Yayi Metal TechnologyLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥85m. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhejiang Yayi Metal TechnologyLtd.

The Impact Of Unusual Items On Profit

Unfortunately (in the short term) Zhejiang Yayi Metal TechnologyLtd saw its profit reduced by unusual items worth CN¥2.5m. If this was a non-cash charge, it would have made the accrual ratio better, if cashflow had stayed strong, so it's not great to see in combination with an uninspiring accrual ratio. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Zhejiang Yayi Metal TechnologyLtd to produce a higher profit next year, all else being equal.

Our Take On Zhejiang Yayi Metal TechnologyLtd's Profit Performance

Zhejiang Yayi Metal TechnologyLtd saw unusual items weigh on its profit, which should have made it easier to show high cash conversion, which it did not do, according to its accrual ratio. Having considered these factors, we don't think Zhejiang Yayi Metal TechnologyLtd's statutory profits give an overly harsh view of the business. If you want to do dive deeper into Zhejiang Yayi Metal TechnologyLtd, you'd also look into what risks it is currently facing. For example, Zhejiang Yayi Metal TechnologyLtd has 4 warning signs (and 3 which are significant) we think you should know about.

Our examination of Zhejiang Yayi Metal TechnologyLtd has focussed on certain factors that can make its earnings look better than they are. 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. 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.