Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's (SZSE:301421) Shareholders Have More To Worry About Than Only Soft Earnings

The subdued market reaction suggests that Nanjing Wavelength Opto-Electronic Science & Technology Co.,Ltd.'s (SZSE:301421) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.

View our latest analysis for Nanjing Wavelength Opto-Electronic Science & TechnologyLtd

Zooming In On Nanjing Wavelength Opto-Electronic Science & TechnologyLtd'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Nanjing Wavelength Opto-Electronic Science & TechnologyLtd has an accrual ratio of 0.39 for the year to September 2024. 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. Over the last year it actually had negative free cash flow of CN¥133m, in contrast to the aforementioned profit of CN¥42.3m. We also note that Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥133m.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's Profit Performance

As we have made quite clear, we're a bit worried that Nanjing Wavelength Opto-Electronic Science & TechnologyLtd didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's underlying earnings power is lower 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. If you want to do dive deeper into Nanjing Wavelength Opto-Electronic Science & TechnologyLtd, you'd also look into what risks it is currently facing. Be aware that Nanjing Wavelength Opto-Electronic Science & TechnologyLtd is showing 3 warning signs in our investment analysis and 2 of those are significant...

This note has only looked at a single factor that sheds light on the nature of Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.