The Strong Earnings Posted By Hangzhou Juheshun New MaterialLTD (SHSE:605166) Are A Good Indication Of The Strength Of The Business

Even though Hangzhou Juheshun New Material Co.,LTD (SHSE:605166 ) posted strong earnings, investors appeared to be underwhelmed. We did some digging and actually think they are being unnecessarily pessimistic.

Check out our latest analysis for Hangzhou Juheshun New MaterialLTD

Examining Cashflow Against Hangzhou Juheshun New MaterialLTD's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. 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.

Hangzhou Juheshun New MaterialLTD has an accrual ratio of -0.16 for the year to September 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥305m, well over the CN¥280.2m it reported in profit. Given that Hangzhou Juheshun New MaterialLTD had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥305m 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

As we discussed above, Hangzhou Juheshun New MaterialLTD has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Hangzhou Juheshun New MaterialLTD's statutory profit actually understates its earnings potential! And the EPS is up 11% annually, over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Hangzhou Juheshun New MaterialLTD as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 1 warning sign for Hangzhou Juheshun New MaterialLTD and you'll want to know about it.

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 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.