We Like Jiangsu Innovative Ecological New Materials' (HKG:2116) Earnings For More Than Just Statutory Profit

The market seemed underwhelmed by last week's earnings announcement from Jiangsu Innovative Ecological New Materials Limited (HKG:2116) despite the healthy numbers. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.

View our latest analysis for Jiangsu Innovative Ecological New Materials

A Closer Look At Jiangsu Innovative Ecological New Materials' 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. The ratio shows us how much a company's profit exceeds its FCF.

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. 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 December 2023, Jiangsu Innovative Ecological New Materials had an accrual ratio of -0.13. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of CN¥40m during the period, dwarfing its reported profit of CN¥21.1m. Given that Jiangsu Innovative Ecological New Materials had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥40m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangsu Innovative Ecological New Materials.

Our Take On Jiangsu Innovative Ecological New Materials' Profit Performance

Jiangsu Innovative Ecological New Materials' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Jiangsu Innovative Ecological New Materials' earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at an extremely impressive rate over 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To that end, you should learn about the 3 warning signs we've spotted with Jiangsu Innovative Ecological New Materials (including 1 which is potentially serious).

This note has only looked at a single factor that sheds light on the nature of Jiangsu Innovative Ecological New Materials' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 that insiders are buying.

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.