Hangzhou Huaguang Advanced Welding MaterialsLtd's (SHSE:688379) Earnings Are Weaker Than They Seem

Unsurprisingly, Hangzhou Huaguang Advanced Welding Materials Co.,Ltd.'s (SHSE:688379) stock price was strong on the back of its healthy earnings report. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.

Check out our latest analysis for Hangzhou Huaguang Advanced Welding MaterialsLtd

Examining Cashflow Against 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). 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. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to September 2024, Hangzhou Huaguang Advanced Welding MaterialsLtd recorded an accrual ratio of 0.24. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥300m despite its profit of CN¥82.9m, mentioned above. 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¥300m.

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. Therefore, it seems possible to us that Hangzhou Huaguang Advanced Welding MaterialsLtd's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 43% EPS growth in the last year. 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. 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. Case in point: We've spotted 3 warning signs for Hangzhou Huaguang Advanced Welding MaterialsLtd you should be mindful of and 2 of these 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 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. 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.