Solid Earnings Reflect Suzhou Hesheng Special Material's (SZSE:002290) Strength As A Business

Suzhou Hesheng Special Material Co., Ltd. (SZSE:002290) just reported healthy earnings but the stock price didn't move much. Investors are probably missing some underlying factors which are encouraging for the future of the company.

Check out our latest analysis for Suzhou Hesheng Special Material

A Closer Look At Suzhou Hesheng Special Material's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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 December 2023, Suzhou Hesheng Special Material recorded an accrual ratio of -0.20. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥223m, well over the CN¥82.8m it reported in profit. Suzhou Hesheng Special Material 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 Suzhou Hesheng Special Material.

Our Take On Suzhou Hesheng Special Material's Profit Performance

As we discussed above, Suzhou Hesheng Special Material's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Suzhou Hesheng Special Material's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 43% annually, over the last three years. 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 Suzhou Hesheng Special Material, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for Suzhou Hesheng Special Material and you'll want to know about this.

This note has only looked at a single factor that sheds light on the nature of Suzhou Hesheng Special Material'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 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.