We Think That There Are More Issues For Sinomach AutomobileLtd (SHSE:600335) Than Just Sluggish Earnings

Last week's earnings announcement from Sinomach Automobile Co.,Ltd. (SHSE:600335) was disappointing to investors, with a sluggish profit figure. Our analysis has found some reasons to be concerned, beyond the weak headline numbers.

View our latest analysis for Sinomach AutomobileLtd

Zooming In On Sinomach AutomobileLtd'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. 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.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Sinomach AutomobileLtd has an accrual ratio of 0.67 for the year to September 2024. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥7.6b despite its profit of CN¥78.9m, mentioned above. We saw that FCF was CN¥700m a year ago though, so Sinomach AutomobileLtd has at least been able to generate positive FCF in the past. One positive for Sinomach AutomobileLtd shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sinomach AutomobileLtd.

Our Take On Sinomach AutomobileLtd's Profit Performance

As we have made quite clear, we're a bit worried that Sinomach AutomobileLtd didn't back up the last year's profit with free cashflow. For this reason, we think that Sinomach AutomobileLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Sadly, its EPS was down over the last twelve months. 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. If you'd like to know more about Sinomach AutomobileLtd as a business, it's important to be aware of any risks it's facing. When we did our research, we found 4 warning signs for Sinomach AutomobileLtd (2 are a bit unpleasant!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Sinomach AutomobileLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.