Hangzhou Juheshun New MaterialLTD's (SHSE:605166) Soft Earnings Are Actually Better Than They Appear

Hangzhou Juheshun New Material Co.,LTD's (SHSE:605166) recent soft profit numbers didn't appear to worry shareholders, as the stock price showed strength. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

View our latest analysis for Hangzhou Juheshun New MaterialLTD

Examining Cashflow Against Hangzhou Juheshun New MaterialLTD's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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.

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.

Over the twelve months to December 2023, Hangzhou Juheshun New MaterialLTD recorded an accrual ratio of -0.15. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of CN¥218m in the last year, which was a lot more than its statutory profit of CN¥196.7m. Given that Hangzhou Juheshun New MaterialLTD had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥218m 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 Hangzhou Juheshun New MaterialLTD's Profit Performance

Hangzhou Juheshun New MaterialLTD's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Hangzhou Juheshun New MaterialLTD's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 48% per year over the last three years. 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. So while earnings quality is important, it's equally important to consider the risks facing Hangzhou Juheshun New MaterialLTD at this point in time. Every company has risks, and we've spotted 1 warning sign for Hangzhou Juheshun New MaterialLTD you should know about.

Today we've zoomed in on a single data point to better understand the nature of Hangzhou Juheshun New MaterialLTD's profit. 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.