Weak Statutory Earnings May Not Tell The Whole Story For Nantong JiangTian Chemical (SZSE:300927)

The subdued market reaction suggests that Nantong JiangTian Chemical Co., Ltd.'s (SZSE:300927) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

View our latest analysis for Nantong JiangTian Chemical

A Closer Look At Nantong JiangTian Chemical'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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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 September 2024, Nantong JiangTian Chemical recorded 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. Even though it reported a profit of CN¥48.6m, a look at free cash flow indicates it actually burnt through CN¥102m in the last year. We also note that Nantong JiangTian Chemical's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥102m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Nantong JiangTian Chemical.

Our Take On Nantong JiangTian Chemical's Profit Performance

As we have made quite clear, we're a bit worried that Nantong JiangTian Chemical didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Nantong JiangTian Chemical's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in 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. 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 (3 are potentially serious!) that you ought to be aware of before buying any shares in Nantong JiangTian Chemical.

This note has only looked at a single factor that sheds light on the nature of Nantong JiangTian Chemical'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.