Guangxi Fenglin Wood Industry GroupLtd's (SHSE:601996) Earnings Seem To Be Promising

Guangxi Fenglin Wood Industry Group Co.,Ltd's (SHSE:601996) solid earnings announcement recently didn't do much to the stock price. We did some analysis to find out why and believe that investors might be missing some encouraging factors contained in the earnings.

View our latest analysis for Guangxi Fenglin Wood Industry GroupLtd

Zooming In On Guangxi Fenglin Wood Industry GroupLtd'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. 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.

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. 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 December 2023, Guangxi Fenglin Wood Industry GroupLtd recorded an accrual ratio of -0.11. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of CN¥338m in the last year, which was a lot more than its statutory profit of CN¥52.3m. Notably, Guangxi Fenglin Wood Industry GroupLtd had negative free cash flow last year, so the CN¥338m it produced this year was a welcome improvement. 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.

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.

The Impact Of Unusual Items On Profit

Guangxi Fenglin Wood Industry GroupLtd's profit was reduced by unusual items worth CN¥14m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. In a scenario where those unusual items included non-cash charges, we'd expect to see a strong accrual ratio, which is exactly what has happened in this case. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Guangxi Fenglin Wood Industry GroupLtd to produce a higher profit next year, all else being equal.

Our Take On Guangxi Fenglin Wood Industry GroupLtd's Profit Performance

In conclusion, both Guangxi Fenglin Wood Industry GroupLtd's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Looking at all these factors, we'd say that Guangxi Fenglin Wood Industry GroupLtd's underlying earnings power is at least as good as the statutory numbers would make it seem. If you'd like to know more about Guangxi Fenglin Wood Industry GroupLtd as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 2 warning signs for Guangxi Fenglin Wood Industry GroupLtd you should know about.

After our examination into the nature of Guangxi Fenglin Wood Industry GroupLtd's profit, we've come away optimistic for the company. 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 that insiders are buying.

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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.