We Like The Quality Of Shuifa Energas Gas' (SHSE:603318) Earnings

Despite posting healthy earnings, Shuifa Energas Gas Co., Ltd.'s (SHSE:603318 ) stock has been quite weak. We have done some analysis, and found some encouraging factors that we believe the shareholders should consider.

Check out our latest analysis for Shuifa Energas Gas

A Closer Look At Shuifa Energas Gas' 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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. 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 June 2024, Shuifa Energas Gas had an accrual ratio of -0.10. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of CN¥357m during the period, dwarfing its reported profit of CN¥80.7m. Shuifa Energas Gas shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shuifa Energas Gas.

Our Take On Shuifa Energas Gas' Profit Performance

Shuifa Energas Gas' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Shuifa Energas Gas' earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 60% annually, over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 2 warning signs with Shuifa Energas Gas, and understanding these should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Shuifa Energas Gas' 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.