We Think That There Are Some Issues For Suzhou Alton Electrical & Mechanical Industry (SZSE:301187) Beyond Its Promising Earnings

The recent earnings posted by Suzhou Alton Electrical & Mechanical Industry Co., Ltd. (SZSE:301187) 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 Suzhou Alton Electrical & Mechanical Industry

Zooming In On Suzhou Alton Electrical & Mechanical Industry's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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.

For the year to September 2024, Suzhou Alton Electrical & Mechanical Industry had an accrual ratio of 0.61. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of CN¥80m, in contrast to the aforementioned profit of CN¥234.7m. We also note that Suzhou Alton Electrical & Mechanical Industry's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥80m.

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 Suzhou Alton Electrical & Mechanical Industry's Profit Performance

As we discussed above, we think Suzhou Alton Electrical & Mechanical Industry's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Suzhou Alton Electrical & Mechanical Industry's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 32% per annum growth in EPS for the last three. 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 Suzhou Alton Electrical & Mechanical Industry as a business, it's important to be aware of any risks it's facing. For example - Suzhou Alton Electrical & Mechanical Industry has 2 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Suzhou Alton Electrical & Mechanical Industry'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. 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.