Beijing Oriental Yuhong Waterproof Technology's (SZSE:002271) Conservative Accounting Might Explain Soft Earnings

The market for Beijing Oriental Yuhong Waterproof Technology Co., Ltd.'s (SZSE:002271) shares didn't move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

View our latest analysis for Beijing Oriental Yuhong Waterproof Technology

Zooming In On Beijing Oriental Yuhong Waterproof 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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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 September 2024, Beijing Oriental Yuhong Waterproof Technology had an accrual ratio of -0.12. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. Indeed, in the last twelve months it reported free cash flow of CN¥4.6b, well over the CN¥1.20b it reported in profit. Beijing Oriental Yuhong Waterproof Technology shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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 Beijing Oriental Yuhong Waterproof Technology's Profit Performance

As we discussed above, Beijing Oriental Yuhong Waterproof Technology has perfectly satisfactory free cash flow relative to profit. Because of this, we think Beijing Oriental Yuhong Waterproof Technology's earnings potential is at least as good as it seems, and maybe even better! Unfortunately, though, its earnings per share actually fell back over the last year. 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. If you want to do dive deeper into Beijing Oriental Yuhong Waterproof Technology, you'd also look into what risks it is currently facing. Case in point: We've spotted 2 warning signs for Beijing Oriental Yuhong Waterproof Technology you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Beijing Oriental Yuhong Waterproof Technology'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 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.