Why Ji'an Mankun Technology's (SZSE:301132) Shaky Earnings Are Just The Beginning Of Its Problems

The subdued market reaction suggests that Ji'an Mankun Technology Co., Ltd.'s (SZSE:301132) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

See our latest analysis for Ji'an Mankun Technology

Examining Cashflow Against Ji'an Mankun Technology'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. 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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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 June 2024, Ji'an Mankun Technology recorded an accrual ratio of 0.30. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Over the last year it actually had negative free cash flow of CN¥156m, in contrast to the aforementioned profit of CN¥98.8m. We also note that Ji'an Mankun Technology's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥156m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Ji'an Mankun Technology.

Our Take On Ji'an Mankun Technology's Profit Performance

Ji'an Mankun Technology didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Ji'an Mankun Technology'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. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Be aware that Ji'an Mankun Technology is showing 3 warning signs in our investment analysis and 2 of those are a bit concerning...

Today we've zoomed in on a single data point to better understand the nature of Ji'an Mankun Technology'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.