Jiangsu Smartwin Electronics TechnologyLtd's (SZSE:301106) Shareholders May Want To Dig Deeper Than Statutory Profit

Jiangsu Smartwin Electronics Technology Co.,Ltd.'s (SZSE:301106) healthy profit numbers didn't contain any surprises for investors. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

See our latest analysis for Jiangsu Smartwin Electronics TechnologyLtd

Zooming In On Jiangsu Smartwin Electronics TechnologyLtd'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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 March 2024, Jiangsu Smartwin Electronics TechnologyLtd had 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¥80.9m, a look at free cash flow indicates it actually burnt through CN¥35m in the last year. It's worth noting that Jiangsu Smartwin Electronics TechnologyLtd generated positive FCF of CN¥7.8m a year ago, so at least they've done it in the past.

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

Our Take On Jiangsu Smartwin Electronics TechnologyLtd's Profit Performance

Jiangsu Smartwin Electronics TechnologyLtd's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Therefore, it seems possible to us that Jiangsu Smartwin Electronics TechnologyLtd's true underlying earnings power is actually less than its statutory profit. In further bad news, its earnings per share decreased in the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Jiangsu Smartwin Electronics TechnologyLtd as a business, it's important to be aware of any risks it's facing. When we did our research, we found 3 warning signs for Jiangsu Smartwin Electronics TechnologyLtd (1 is a bit concerning!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Jiangsu Smartwin Electronics TechnologyLtd'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.