JiangSu Jinji IndustrialLtd (SZSE:300798) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Unsurprisingly, JiangSu Jinji Industrial Co.,Ltd.'s (SZSE:300798) stock price was strong on the back of its healthy earnings report. However, we think that shareholders may be missing some concerning details in the numbers.

View our latest analysis for JiangSu Jinji IndustrialLtd

Zooming In On JiangSu Jinji IndustrialLtd'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. 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 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. 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 March 2024, JiangSu Jinji IndustrialLtd had an accrual ratio of 0.35. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥531m despite its profit of CN¥18.0m, mentioned above. We also note that JiangSu Jinji IndustrialLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥531m. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of JiangSu Jinji IndustrialLtd.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. JiangSu Jinji IndustrialLtd expanded the number of shares on issue by 12% over the last year. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of JiangSu Jinji IndustrialLtd's EPS by clicking here.

A Look At The Impact Of JiangSu Jinji IndustrialLtd's Dilution On Its Earnings Per Share (EPS)

JiangSu Jinji IndustrialLtd's net profit dropped by 50% per year over the last three years. The good news is that profit was up 351% in the last twelve months. On the other hand, earnings per share are only up 339% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if JiangSu Jinji IndustrialLtd can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On JiangSu Jinji IndustrialLtd's Profit Performance

As it turns out, JiangSu Jinji IndustrialLtd couldn't match its profit with cashflow and its dilution means that earnings per share growth is lagging net income growth. For the reasons mentioned above, we think that a perfunctory glance at JiangSu Jinji IndustrialLtd's statutory profits might make it look better than it really is on an underlying level. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. To help with this, we've discovered 4 warning signs (2 are potentially serious!) that you ought to be aware of before buying any shares in JiangSu Jinji IndustrialLtd.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. 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.