Shareholders Will Be Pleased With The Quality of Tongyi Carbon Neutral Technology (Xinjiang)'s (SHSE:600506) Earnings

Investors were underwhelmed by the solid earnings posted by Tongyi Carbon Neutral Technology (Xinjiang) Co., Ltd (SHSE:600506) recently. We have done some analysis and have found some comforting factors beneath the profit numbers.

View our latest analysis for Tongyi Carbon Neutral Technology (Xinjiang)

A Closer Look At Tongyi Carbon Neutral Technology (Xinjiang)'s Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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.

Tongyi Carbon Neutral Technology (Xinjiang) has an accrual ratio of -0.31 for the year to December 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of CN¥411m, well over the CN¥31.4m it reported in profit. Tongyi Carbon Neutral Technology (Xinjiang)'s free cash flow improved over the last year, which is generally good to see. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Tongyi Carbon Neutral Technology (Xinjiang).

How Do Unusual Items Influence Profit?

Surprisingly, given Tongyi Carbon Neutral Technology (Xinjiang)'s accrual ratio implied strong cash conversion, its paper profit was actually boosted by CN¥7.2m in unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Tongyi Carbon Neutral Technology (Xinjiang) doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Tongyi Carbon Neutral Technology (Xinjiang)'s Profit Performance

In conclusion, Tongyi Carbon Neutral Technology (Xinjiang)'s accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Considering all the aforementioned, we'd venture that Tongyi Carbon Neutral Technology (Xinjiang)'s profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. If you'd like to know more about Tongyi Carbon Neutral Technology (Xinjiang) as a business, it's important to be aware of any risks it's facing. Our analysis shows 3 warning signs for Tongyi Carbon Neutral Technology (Xinjiang) (2 are a bit unpleasant!) and we strongly recommend you look at them before investing.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there are plenty of other ways to inform your opinion of a company. 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.