Zhejiang Jingsheng Mechanical & Electrical's (SZSE:300316) Shareholders May Want To Dig Deeper Than Statutory Profit

Zhejiang Jingsheng Mechanical & Electrical Co., Ltd.'s (SZSE:300316) robust recent earnings didn't do much to move the stock. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

Check out our latest analysis for Zhejiang Jingsheng Mechanical & Electrical

A Closer Look At Zhejiang Jingsheng Mechanical & Electrical'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Zhejiang Jingsheng Mechanical & Electrical has an accrual ratio of 0.35 for the year to December 2023. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Indeed, in the last twelve months it reported free cash flow of CN¥613m, which is significantly less than its profit of CN¥4.56b. Notably, Zhejiang Jingsheng Mechanical & Electrical had negative free cash flow last year, so the CN¥613m it produced this year was a welcome improvement.

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 Zhejiang Jingsheng Mechanical & Electrical's Profit Performance

As we have made quite clear, we're a bit worried that Zhejiang Jingsheng Mechanical & Electrical didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Zhejiang Jingsheng Mechanical & Electrical's underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, Zhejiang Jingsheng Mechanical & Electrical has 2 warning signs (and 1 which is significant) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of Zhejiang Jingsheng Mechanical & Electrical'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. 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.