Concerns Surrounding Jiangsu Lettall ElectronicLtd's (SHSE:603629) Performance

Jiangsu Lettall Electronic Co.,Ltd's (SHSE:603629) robust recent earnings didn't do much to move the stock. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

Check out our latest analysis for Jiangsu Lettall ElectronicLtd

A Closer Look At Jiangsu Lettall ElectronicLtd's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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, Jiangsu Lettall ElectronicLtd recorded an accrual ratio of 0.46. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of CN¥62.3m, a look at free cash flow indicates it actually burnt through CN¥796m in the last year. We saw that FCF was CN¥177m a year ago though, so Jiangsu Lettall ElectronicLtd has at least been able to generate positive FCF in the past. The good news for shareholders is that Jiangsu Lettall ElectronicLtd'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. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangsu Lettall ElectronicLtd.

Our Take On Jiangsu Lettall ElectronicLtd's Profit Performance

As we have made quite clear, we're a bit worried that Jiangsu Lettall ElectronicLtd didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Jiangsu Lettall ElectronicLtd's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 41% EPS growth in the last year. 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. Case in point: We've spotted 1 warning sign for Jiangsu Lettall ElectronicLtd you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Jiangsu Lettall ElectronicLtd's profit. But there are plenty of other ways to inform your opinion of a company. 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 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.