We Think JNBY Design's (HKG:3306) Robust Earnings Are Conservative

When companies post strong earnings, the stock generally performs well, just like JNBY Design Limited's (HKG:3306) stock has recently. We have done some analysis, and we found several positive factors beyond the profit numbers.

View our latest analysis for JNBY Design

A Closer Look At JNBY Design'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. 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'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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.

JNBY Design has an accrual ratio of -0.69 for the year to June 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of CN¥1.5b in the last year, which was a lot more than its statutory profit of CN¥849.1m. JNBY Design shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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 JNBY Design's Profit Performance

As we discussed above, JNBY Design's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that JNBY Design's statutory profit actually understates its earnings potential! And the EPS is up 29% annually, over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. At Simply Wall St, we found 1 warning sign for JNBY Design and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of JNBY Design'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. 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.