Earnings Troubles May Signal Larger Issues for Jiangxi Yuean Advanced MaterialsLtd (SHSE:688786) Shareholders

A lackluster earnings announcement from Jiangxi Yuean Advanced Materials Co.,Ltd. (SHSE:688786) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

View our latest analysis for Jiangxi Yuean Advanced MaterialsLtd

A Closer Look At Jiangxi Yuean Advanced MaterialsLtd'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.

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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to December 2023, Jiangxi Yuean Advanced MaterialsLtd had an accrual ratio of 0.32. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Even though it reported a profit of CN¥79.9m, a look at free cash flow indicates it actually burnt through CN¥79m in the last year. It's worth noting that Jiangxi Yuean Advanced MaterialsLtd generated positive FCF of CN¥53m 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 Jiangxi Yuean Advanced MaterialsLtd's Profit Performance

As we discussed above, we think Jiangxi Yuean Advanced MaterialsLtd's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Jiangxi Yuean Advanced MaterialsLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Nonetheless, it's still worth noting that its earnings per share have grown at 15% 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 want to do dive deeper into Jiangxi Yuean Advanced MaterialsLtd, you'd also look into what risks it is currently facing. When we did our research, we found 2 warning signs for Jiangxi Yuean Advanced MaterialsLtd (1 is significant!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Jiangxi Yuean Advanced 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 that insiders are buying 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.