Jilin Joinature PolymerLtd's (SHSE:688716) Anemic Earnings Might Be Worse Than You Think

The subdued market reaction suggests that Jilin Joinature Polymer Co.,Ltd.'s (SHSE:688716) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

Check out our latest analysis for Jilin Joinature PolymerLtd

Zooming In On Jilin Joinature PolymerLtd'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.

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. 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 March 2024, Jilin Joinature PolymerLtd recorded an accrual ratio of 0.44. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of CN¥46.8m, a look at free cash flow indicates it actually burnt through CN¥118m in the last year. We also note that Jilin Joinature PolymerLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥118m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jilin Joinature PolymerLtd.

Our Take On Jilin Joinature PolymerLtd's Profit Performance

As we have made quite clear, we're a bit worried that Jilin Joinature PolymerLtd didn't back up the last year's profit with free cashflow. For this reason, we think that Jilin Joinature PolymerLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But at least holders can take some solace from the 22% per annum growth in EPS for the last three. 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. So while earnings quality is important, it's equally important to consider the risks facing Jilin Joinature PolymerLtd at this point in time. In terms of investment risks, we've identified 1 warning sign with Jilin Joinature PolymerLtd, and understanding this should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Jilin Joinature PolymerLtd's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.