There May Be Underlying Issues With The Quality Of Jiangsu Yoke Technology's (SZSE:002409) Earnings

Despite posting some strong earnings, the market for Jiangsu Yoke Technology Co., Ltd.'s (SZSE:002409) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for Jiangsu Yoke Technology

Examining Cashflow Against Jiangsu Yoke Technology'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. 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. 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 September 2024, Jiangsu Yoke Technology recorded an accrual ratio of 0.20. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Over the last year it actually had negative free cash flow of CN¥993m, in contrast to the aforementioned profit of CN¥847.6m. We also note that Jiangsu Yoke Technology's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥993m.

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 Jiangsu Yoke Technology's Profit Performance

Jiangsu Yoke Technology's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that Jiangsu Yoke Technology's statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Jiangsu Yoke Technology at this point in time. Every company has risks, and we've spotted 2 warning signs for Jiangsu Yoke Technology (of which 1 is a bit concerning!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Jiangsu Yoke Technology's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.