Jiangsu Kangliyuan Sports Tech's (SZSE:301287) Earnings May Just Be The Starting Point

Investors were underwhelmed by the solid earnings posted by Jiangsu Kangliyuan Sports Tech. Co., Ltd. (SZSE:301287) recently. We have done some analysis and have found some comforting factors beneath the profit numbers.

View our latest analysis for Jiangsu Kangliyuan Sports Tech

Examining Cashflow Against Jiangsu Kangliyuan Sports Tech's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. 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.

Jiangsu Kangliyuan Sports Tech has an accrual ratio of -0.11 for the year to March 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥102m, well over the CN¥93.1m it reported in profit. Jiangsu Kangliyuan Sports Tech's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangsu Kangliyuan Sports Tech.

The Impact Of Unusual Items On Profit

Jiangsu Kangliyuan Sports Tech's profit was reduced by unusual items worth CN¥11m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. In a scenario where those unusual items included non-cash charges, we'd expect to see a strong accrual ratio, which is exactly what has happened in this case. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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 Jiangsu Kangliyuan Sports Tech to produce a higher profit next year, all else being equal.

Our Take On Jiangsu Kangliyuan Sports Tech's Profit Performance

In conclusion, both Jiangsu Kangliyuan Sports Tech's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Looking at all these factors, we'd say that Jiangsu Kangliyuan Sports Tech's underlying earnings power is at least as good as the statutory numbers would make it seem. If you want to do dive deeper into Jiangsu Kangliyuan Sports Tech, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 2 warning signs with Jiangsu Kangliyuan Sports Tech, and understanding these should be part of your investment process.

Our examination of Jiangsu Kangliyuan Sports Tech has focussed on certain factors that can make its earnings look better than they are. And it has passed with flying colours. 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 that insiders are buying 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.