We Like The Quality Of Chongqing Fuling Electric Power Industrial's (SHSE:600452) Earnings

Despite posting healthy earnings, Chongqing Fuling Electric Power Industrial Co., Ltd.'s (SHSE:600452 ) stock has been quite weak. We have done some analysis, and found some encouraging factors that we believe the shareholders should consider.

View our latest analysis for Chongqing Fuling Electric Power Industrial

Examining Cashflow Against Chongqing Fuling Electric Power Industrial's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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".

For the year to June 2024, Chongqing Fuling Electric Power Industrial had an accrual ratio of -0.21. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥982m, well over the CN¥462.7m it reported in profit. Over the last year, Chongqing Fuling Electric Power Industrial's free cash flow remained steady.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Chongqing Fuling Electric Power Industrial.

Our Take On Chongqing Fuling Electric Power Industrial's Profit Performance

Happily for shareholders, Chongqing Fuling Electric Power Industrial produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Chongqing Fuling Electric Power Industrial's statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 16% in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. At Simply Wall St, we found 1 warning sign for Chongqing Fuling Electric Power Industrial and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Chongqing Fuling Electric Power Industrial'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.