Hangzhou Huaguang Advanced Welding MaterialsLtd (SHSE:688379) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Hangzhou Huaguang Advanced Welding Materials Co.,Ltd.'s (SHSE:688379) stock was strong after they recently reported robust earnings. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

View our latest analysis for Hangzhou Huaguang Advanced Welding MaterialsLtd

Zooming In On Hangzhou Huaguang Advanced Welding MaterialsLtd'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). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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.

Hangzhou Huaguang Advanced Welding MaterialsLtd has an accrual ratio of 0.22 for the year to December 2023. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of CN¥246m, in contrast to the aforementioned profit of CN¥41.6m. We also note that Hangzhou Huaguang Advanced Welding MaterialsLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥246m.

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 Huaguang Advanced Welding MaterialsLtd's Profit Performance

Hangzhou Huaguang Advanced Welding MaterialsLtd didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Hangzhou Huaguang Advanced Welding MaterialsLtd's statutory profits are better than its underlying earnings power. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Hangzhou Huaguang Advanced Welding MaterialsLtd as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Hangzhou Huaguang Advanced Welding MaterialsLtd (including 2 which are concerning).

Today we've zoomed in on a single data point to better understand the nature of Hangzhou Huaguang Advanced Welding MaterialsLtd's profit. 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.