Zhejiang Wellsun Intelligent TechnologyLtd's (SZSE:300882) Anemic Earnings Might Be Worse Than You Think

A lackluster earnings announcement from Zhejiang Wellsun Intelligent Technology Co.,Ltd. (SZSE:300882) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

Check out our latest analysis for Zhejiang Wellsun Intelligent TechnologyLtd

Examining Cashflow Against Zhejiang Wellsun Intelligent TechnologyLtd'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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2024, Zhejiang Wellsun Intelligent TechnologyLtd had an accrual ratio of -0.11. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of CN¥217m, well over the CN¥165.5m it reported in profit. Zhejiang Wellsun Intelligent TechnologyLtd did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhejiang Wellsun Intelligent TechnologyLtd.

The Impact Of Unusual Items On Profit

While the accrual ratio might bode well, we also note that Zhejiang Wellsun Intelligent TechnologyLtd's profit was boosted by unusual items worth CN¥18m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Zhejiang Wellsun Intelligent TechnologyLtd's Profit Performance

Zhejiang Wellsun Intelligent TechnologyLtd's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Based on these factors, it's hard to tell if Zhejiang Wellsun Intelligent TechnologyLtd's profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into Zhejiang Wellsun Intelligent TechnologyLtd, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for Zhejiang Wellsun Intelligent TechnologyLtd and you'll want to know about this.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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 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.