We Think That There Are Some Issues For Yunnan Bowin Technology IndustryLtd (SHSE:600883) Beyond Its Promising Earnings

The recent earnings posted by Yunnan Bowin Technology Industry Co.,Ltd (SHSE:600883) were solid, but the stock didn't move as much as we expected. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

View our latest analysis for Yunnan Bowin Technology IndustryLtd

Examining Cashflow Against Yunnan Bowin Technology IndustryLtd'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. 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. 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. 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.

Yunnan Bowin Technology IndustryLtd has an accrual ratio of 0.20 for the year to December 2023. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of CN¥96.2m, a look at free cash flow indicates it actually burnt through CN¥38m in the last year. We also note that Yunnan Bowin Technology IndustryLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥38m. 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 Yunnan Bowin Technology IndustryLtd.

The Impact Of Unusual Items On Profit

Given the accrual ratio, it's not overly surprising that Yunnan Bowin Technology IndustryLtd's profit was boosted by unusual items worth CN¥5.2m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Yunnan Bowin Technology IndustryLtd's Profit Performance

Yunnan Bowin Technology IndustryLtd had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Yunnan Bowin Technology IndustryLtd's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Yunnan Bowin Technology IndustryLtd, you'd also look into what risks it is currently facing. Case in point: We've spotted 4 warning signs for Yunnan Bowin Technology IndustryLtd you should be mindful of and 1 of these doesn't sit too well with us.

Our examination of Yunnan Bowin Technology IndustryLtd has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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.