Investors Shouldn't Be Too Comfortable With China Green Electricity Investment of Tianjin's (SZSE:000537) Earnings

Despite posting some strong earnings, the market for China Green Electricity Investment of Tianjin Co., Ltd.'s (SZSE:000537) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

Check out our latest analysis for China Green Electricity Investment of Tianjin

A Closer Look At China Green Electricity Investment of Tianjin'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). 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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".

Over the twelve months to March 2024, China Green Electricity Investment of Tianjin recorded an accrual ratio of 0.63. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of CN¥852.0m, a look at free cash flow indicates it actually burnt through CN¥26b in the last year. We saw that FCF was CN¥161m a year ago though, so China Green Electricity Investment of Tianjin has at least been able to generate positive FCF in the past.

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 China Green Electricity Investment of Tianjin's Profit Performance

As we discussed above, we think China Green Electricity Investment of Tianjin's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that China Green Electricity Investment of Tianjin's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that, its earnings per share increased by 13% 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. If you want to do dive deeper into China Green Electricity Investment of Tianjin, you'd also look into what risks it is currently facing. To that end, you should learn about the 3 warning signs we've spotted with China Green Electricity Investment of Tianjin (including 2 which can't be ignored).

This note has only looked at a single factor that sheds light on the nature of China Green Electricity Investment of Tianjin'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.