Suzhou K-Hiragawa Electronic Technology's (SHSE:603052) Problems Go Beyond Weak Profit

Suzhou K-Hiragawa Electronic Technology Co., Ltd.'s (SHSE:603052) recent weak earnings report didn't cause a big stock movement. However, we believe that investors should be aware of some underlying factors which may be of concern.

See our latest analysis for Suzhou K-Hiragawa Electronic Technology

Zooming In On Suzhou K-Hiragawa Electronic Technology'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). 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.

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 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. 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 September 2024, Suzhou K-Hiragawa Electronic Technology recorded an accrual ratio of 0.22. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of CN¥77.0m, a look at free cash flow indicates it actually burnt through CN¥11m in the last year. It's worth noting that Suzhou K-Hiragawa Electronic Technology generated positive FCF of CN¥134m a year ago, so at least they've done it in the past. The good news for shareholders is that Suzhou K-Hiragawa Electronic Technology's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. 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 Suzhou K-Hiragawa Electronic Technology.

Our Take On Suzhou K-Hiragawa Electronic Technology's Profit Performance

Suzhou K-Hiragawa Electronic Technology didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Suzhou K-Hiragawa Electronic Technology's statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. 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 while earnings quality is important, it's equally important to consider the risks facing Suzhou K-Hiragawa Electronic Technology at this point in time. To that end, you should learn about the 2 warning signs we've spotted with Suzhou K-Hiragawa Electronic Technology (including 1 which doesn't sit too well with us).

This note has only looked at a single factor that sheds light on the nature of Suzhou K-Hiragawa Electronic Technology'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. 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 with significant insider holdings 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.