Why Hubei Shuanghuan Science and Technology StockLtd's (SZSE:000707) Shaky Earnings Are Just The Beginning Of Its Problems

Investors were disappointed by Hubei Shuanghuan Science and Technology Stock Co.,Ltd's (SZSE:000707 ) latest earnings release. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

Check out our latest analysis for Hubei Shuanghuan Science and Technology StockLtd

Examining Cashflow Against Hubei Shuanghuan Science and Technology StockLtd'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2024, Hubei Shuanghuan Science and Technology StockLtd had an accrual ratio of 0.27. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of CN¥84m, in contrast to the aforementioned profit of CN¥489.7m. We saw that FCF was CN¥311m a year ago though, so Hubei Shuanghuan Science and Technology StockLtd has at least been able to generate positive FCF in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hubei Shuanghuan Science and Technology StockLtd.

Our Take On Hubei Shuanghuan Science and Technology StockLtd's Profit Performance

Hubei Shuanghuan Science and Technology StockLtd didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Hubei Shuanghuan Science and Technology StockLtd's statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 2 warning signs for Hubei Shuanghuan Science and Technology StockLtd you should be mindful of and 1 of these is concerning.

Today we've zoomed in on a single data point to better understand the nature of Hubei Shuanghuan Science and Technology StockLtd'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.