Shan Xi Hua Yang Group New EnergyLtd's (SHSE:600348) Sluggish Earnings Might Be Just The Beginning Of Its Problems

A lackluster earnings announcement from Shan Xi Hua Yang Group New Energy Co.,Ltd. (SHSE:600348) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.

View our latest analysis for Shan Xi Hua Yang Group New EnergyLtd

Zooming In On Shan Xi Hua Yang Group New EnergyLtd'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. 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. 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. 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.

Shan Xi Hua Yang Group New EnergyLtd has an accrual ratio of 0.32 for the year to September 2024. 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¥11b, in contrast to the aforementioned profit of CN¥2.73b. We saw that FCF was CN¥4.5b a year ago though, so Shan Xi Hua Yang Group New EnergyLtd has at least been able to generate positive FCF in the past.

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 Shan Xi Hua Yang Group New EnergyLtd's Profit Performance

Shan Xi Hua Yang Group New EnergyLtd didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Shan Xi Hua Yang Group New EnergyLtd'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'd like to know more about Shan Xi Hua Yang Group New EnergyLtd as a business, it's important to be aware of any risks it's facing. For example, we've found that Shan Xi Hua Yang Group New EnergyLtd has 3 warning signs (2 can't be ignored!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of Shan Xi Hua Yang Group New EnergyLtd'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. 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.