Shanghai Putailai New Energy TechnologyLtd's (SHSE:603659) Weak Earnings May Only Reveal A Part Of The Whole Picture

Investors were disappointed by Shanghai Putailai New Energy Technology Co.,Ltd.'s (SHSE:603659 ) latest earnings release. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

Check out our latest analysis for Shanghai Putailai New Energy TechnologyLtd

Examining Cashflow Against Shanghai Putailai New Energy TechnologyLtd's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Shanghai Putailai New Energy TechnologyLtd has an accrual ratio of 0.32 for the year to March 2024. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Over the last year it actually had negative free cash flow of CN¥3.9b, in contrast to the aforementioned profit of CN¥1.65b. We also note that Shanghai Putailai New Energy TechnologyLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥3.9b. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

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.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Shanghai Putailai New Energy TechnologyLtd issued 5.5% more new shares over the last year. As a result, its net income is now split between a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Shanghai Putailai New Energy TechnologyLtd's historical EPS growth by clicking on this link.

How Is Dilution Impacting Shanghai Putailai New Energy TechnologyLtd's Earnings Per Share (EPS)?

As you can see above, Shanghai Putailai New Energy TechnologyLtd has been growing its net income over the last few years, with an annualized gain of 82% over three years. In comparison, earnings per share only gained 65% over the same period. Net income was down 48% over the last twelve months. But the EPS result was even worse, with the company recording a decline of 48%. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Shanghai Putailai New Energy TechnologyLtd's earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Shanghai Putailai New Energy TechnologyLtd's Profit Performance

In conclusion, Shanghai Putailai New Energy TechnologyLtd has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). Considering all this we'd argue Shanghai Putailai New Energy TechnologyLtd's profits probably give an overly generous impression of its sustainable level of profitability. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example, Shanghai Putailai New Energy TechnologyLtd has 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. 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.