Weak Statutory Earnings May Not Tell The Whole Story For Nanjing Wavelength Opto-Electronic Science & TechnologyLtd (SZSE:301421)

The market rallied behind Nanjing Wavelength Opto-Electronic Science & Technology Co.,Ltd.'s (SZSE:301421) stock, leading do a rise in the share price after its recent weak earnings report. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Nanjing Wavelength Opto-Electronic Science & TechnologyLtd.

Check out 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. 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. 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. 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 0.34 for the year to March 2024. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥80m despite its profit of CN¥54.6m, mentioned above. 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¥80m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Nanjing Wavelength Opto-Electronic Science & TechnologyLtd.

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

As we discussed above, we think Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's earnings were not supported by free cash flow, which might concern some investors. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Be aware that Nanjing Wavelength Opto-Electronic Science & TechnologyLtd is showing 3 warning signs in our investment analysis and 1 of those is a bit concerning...

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 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 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.