Some May Be Optimistic About Zhejiang Kingland Pipeline and TechnologiesLtd's (SZSE:002443) Earnings

Shareholders appeared unconcerned with Zhejiang Kingland Pipeline and Technologies Co.,Ltd.'s (SZSE:002443) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Check out our latest analysis for Zhejiang Kingland Pipeline and TechnologiesLtd

Zooming In On Zhejiang Kingland Pipeline and TechnologiesLtd'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). 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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 September 2024, Zhejiang Kingland Pipeline and TechnologiesLtd recorded an accrual ratio of -0.17. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CN¥668m in the last year, which was a lot more than its statutory profit of CN¥178.9m. Zhejiang Kingland Pipeline and TechnologiesLtd 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 Zhejiang Kingland Pipeline and TechnologiesLtd.

Our Take On Zhejiang Kingland Pipeline and TechnologiesLtd's Profit Performance

Happily for shareholders, Zhejiang Kingland Pipeline and TechnologiesLtd produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Zhejiang Kingland Pipeline and TechnologiesLtd's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Unfortunately, though, its earnings per share actually fell back over the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Zhejiang Kingland Pipeline and TechnologiesLtd as a business, it's important to be aware of any risks it's facing. For example, we've found that Zhejiang Kingland Pipeline and TechnologiesLtd has 2 warning signs (1 is a bit concerning!) that deserve your attention before going any further with your analysis.

This note has only looked at a single factor that sheds light on the nature of Zhejiang Kingland Pipeline and TechnologiesLtd'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.