Tianjin You Fa Steel Pipe Group Stock's (SHSE:601686) Soft Earnings Are Actually Better Than They Appear

Shareholders appeared unconcerned with Tianjin You Fa Steel Pipe Group Stock Co., Ltd.'s (SHSE:601686) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

See our latest analysis for Tianjin You Fa Steel Pipe Group Stock

A Closer Look At Tianjin You Fa Steel Pipe Group Stock'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2024, Tianjin You Fa Steel Pipe Group Stock had an accrual ratio of -0.52. 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¥2.2b, well over the CN¥232.3m it reported in profit. Given that Tianjin You Fa Steel Pipe Group Stock had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥2.2b would seem to be a step in the right direction.

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 Tianjin You Fa Steel Pipe Group Stock's Profit Performance

Happily for shareholders, Tianjin You Fa Steel Pipe Group Stock produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Tianjin You Fa Steel Pipe Group Stock's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! On the other hand, its EPS actually shrunk in the last twelve months. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. In terms of investment risks, we've identified 2 warning signs with Tianjin You Fa Steel Pipe Group Stock, and understanding these bad boys should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Tianjin You Fa Steel Pipe Group Stock's profit. 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. 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.