We Think JiaoZuo WanFang Aluminum Manufacturing's (SZSE:000612) Robust Earnings Are Conservative

Even though JiaoZuo WanFang Aluminum Manufacturing Co., Ltd's (SZSE:000612) recent earnings release was robust, the market didn't seem to notice. We think that investors have missed some encouraging factors underlying the profit figures.

See our latest analysis for JiaoZuo WanFang Aluminum Manufacturing

Examining Cashflow Against JiaoZuo WanFang Aluminum Manufacturing'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. 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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. 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, JiaoZuo WanFang Aluminum Manufacturing recorded an accrual ratio of -0.12. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of CN¥1.4b in the last year, which was a lot more than its statutory profit of CN¥710.3m. Notably, JiaoZuo WanFang Aluminum Manufacturing had negative free cash flow last year, so the CN¥1.4b it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of JiaoZuo WanFang Aluminum Manufacturing.

Our Take On JiaoZuo WanFang Aluminum Manufacturing's Profit Performance

As we discussed above, JiaoZuo WanFang Aluminum Manufacturing has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that JiaoZuo WanFang Aluminum Manufacturing's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at an extremely impressive rate over 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Every company has risks, and we've spotted 1 warning sign for JiaoZuo WanFang Aluminum Manufacturing you should know about.

This note has only looked at a single factor that sheds light on the nature of JiaoZuo WanFang Aluminum Manufacturing'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.