Why Xinjiang Lixin Energy's (SZSE:001258) Shaky Earnings Are Just The Beginning Of Its Problems

The subdued market reaction suggests that Xinjiang Lixin Energy Co., LTD.'s (SZSE:001258) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

View our latest analysis for Xinjiang Lixin Energy

Zooming In On Xinjiang Lixin Energy'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. 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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. 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 September 2024, Xinjiang Lixin Energy had an accrual ratio of 0.29. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Even though it reported a profit of CN¥66.4m, a look at free cash flow indicates it actually burnt through CN¥2.9b in the last year. We also note that Xinjiang Lixin Energy's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥2.9b.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Xinjiang Lixin Energy.

Our Take On Xinjiang Lixin Energy's Profit Performance

Xinjiang Lixin Energy'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 Xinjiang Lixin Energy'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. 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. If you want to do dive deeper into Xinjiang Lixin Energy, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 4 warning signs for Xinjiang Lixin Energy (of which 3 shouldn't be ignored!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Xinjiang Lixin Energy's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.