Why Beijing Tongyizhong New Material Technology's (SHSE:688722) Shaky Earnings Are Just The Beginning Of Its Problems

The subdued market reaction suggests that Beijing Tongyizhong New Material Technology Corporation's (SHSE:688722) 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 Beijing Tongyizhong New Material Technology

A Closer Look At Beijing Tongyizhong New Material Technology'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.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to December 2023, Beijing Tongyizhong New Material Technology had an accrual ratio of 0.47. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of CN¥179m, in contrast to the aforementioned profit of CN¥153.6m. It's worth noting that Beijing Tongyizhong New Material Technology generated positive FCF of CN¥147m a year ago, so at least they've done it in the past.

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 Beijing Tongyizhong New Material Technology's Profit Performance

As we discussed above, we think Beijing Tongyizhong New Material Technology's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Beijing Tongyizhong New Material Technology'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 the good news is that its EPS growth over the last three years has been very impressive. 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. So while earnings quality is important, it's equally important to consider the risks facing Beijing Tongyizhong New Material Technology at this point in time. For instance, we've identified 2 warning signs for Beijing Tongyizhong New Material Technology (1 is a bit unpleasant) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Beijing Tongyizhong New Material Technology'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. 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.