Investors Can Find Comfort In Jutal Offshore Oil Services' (HKG:3303) Earnings Quality

Soft earnings didn't appear to concern Jutal Offshore Oil Services Limited's (HKG:3303) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

We've discovered 1 warning sign about Jutal Offshore Oil Services. View them for free.

A Closer Look At Jutal Offshore Oil Services' 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Jutal Offshore Oil Services has an accrual ratio of -0.11 for the year to December 2024. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of CN¥338m in the last year, which was a lot more than its statutory profit of CN¥185.1m. Jutal Offshore Oil Services' free cash flow improved over the last year, which is generally good to see. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

See our latest analysis for Jutal Offshore Oil Services

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jutal Offshore Oil Services.

How Do Unusual Items Influence Profit?

Jutal Offshore Oil Services' profit was reduced by unusual items worth CN¥31m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Jutal Offshore Oil Services to produce a higher profit next year, all else being equal.

Our Take On Jutal Offshore Oil Services' Profit Performance

Considering both Jutal Offshore Oil Services' accrual ratio and its unusual items, we think its statutory earnings are unlikely to exaggerate the company's underlying earnings power. Looking at all these factors, we'd say that Jutal Offshore Oil Services' underlying earnings power is at least as good as the statutory numbers would make it seem. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 1 warning sign for Jutal Offshore Oil Services you should know about.

After our examination into the nature of Jutal Offshore Oil Services' profit, we've come away optimistic for the company. 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 with significant insider holdings to be useful.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.