We Think That There Are More Issues For Xinjiang Haoyuan Natural Gas (SZSE:002700) Than Just Sluggish Earnings

Investors were disappointed by Xinjiang Haoyuan Natural Gas Co., Ltd.'s (SZSE:002700 ) latest earnings release. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.

View our latest analysis for Xinjiang Haoyuan Natural Gas

Examining Cashflow Against Xinjiang Haoyuan Natural Gas' 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.

Xinjiang Haoyuan Natural Gas has an accrual ratio of 0.37 for the year to June 2024. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of CN¥8.4m, in contrast to the aforementioned profit of CN¥93.6m. It's worth noting that Xinjiang Haoyuan Natural Gas generated positive FCF of CN¥133m a year ago, so at least they've done it in the past. One positive for Xinjiang Haoyuan Natural Gas shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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

Our Take On Xinjiang Haoyuan Natural Gas' Profit Performance

As we discussed above, we think Xinjiang Haoyuan Natural Gas' earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Xinjiang Haoyuan Natural Gas' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. 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. To help with this, we've discovered 2 warning signs (1 is a bit unpleasant!) that you ought to be aware of before buying any shares in Xinjiang Haoyuan Natural Gas.

Today we've zoomed in on a single data point to better understand the nature of Xinjiang Haoyuan Natural Gas' 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.