Shareholders Will Be Pleased With The Quality of YONFER Agricultural Technology's (SZSE:000902) Earnings

The subdued stock price reaction suggests that YONFER Agricultural Technology Co., Ltd.'s (SZSE:000902) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

Check out our latest analysis for YONFER Agricultural Technology

A Closer Look At YONFER Agricultural Technology's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to June 2024, YONFER Agricultural Technology recorded an accrual ratio of -0.10. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of CN¥2.2b, well over the CN¥1.25b it reported in profit. Given that YONFER Agricultural Technology had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥2.2b would seem to be a step in the right direction.

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 YONFER Agricultural Technology's Profit Performance

As we discussed above, YONFER Agricultural Technology has perfectly satisfactory free cash flow relative to profit. Because of this, we think YONFER Agricultural Technology's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 15% annually, 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. So while earnings quality is important, it's equally important to consider the risks facing YONFER Agricultural Technology at this point in time. You'd be interested to know, that we found 1 warning sign for YONFER Agricultural Technology and you'll want to know about it.

Today we've zoomed in on a single data point to better understand the nature of YONFER Agricultural Technology's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 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.