We Think China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd's (SZSE:000758) Profit Is Only A Baseline For What They Can Achieve

When companies post strong earnings, the stock generally performs well, just like China Nonferrous Metal Industry's Foreign Engineering and Construction Co.,Ltd.'s (SZSE:000758) stock has recently. We did some digging and found some further encouraging factors that investors will like.

See our latest analysis for China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd

Zooming In On China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. The ratio shows us how much a company's profit exceeds its FCF.

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 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd has an accrual ratio of -0.14 for the year to December 2023. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of CN¥1.9b during the period, dwarfing its reported profit of CN¥359.1m. China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd.

Our Take On China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd's Profit Performance

China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd's earnings potential is at least as good as it seems, and maybe even better! Better yet, its EPS are growing strongly, which is nice to see. 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. While it's very important to consider the profit and loss statement, you can also learn a lot about a company by looking at its balance sheet. We've done some analysis and you can see our take on China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd's balance sheet by clicking here.

This note has only looked at a single factor that sheds light on the nature of China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd'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. 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.