Stock Analysis

Why JiaXing Gas Group's (HKG:9908) Earnings Are Better Than They Seem

SEHK:9908
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The market seemed underwhelmed by last week's earnings announcement from JiaXing Gas Group Co., Ltd. (HKG:9908) despite the healthy numbers. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.

Check out our latest analysis for JiaXing Gas Group

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SEHK:9908 Earnings and Revenue History May 3rd 2021

Zooming In On JiaXing Gas Group'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. The ratio shows us how much a company's profit exceeds its FCF.

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. 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.

JiaXing Gas Group has an accrual ratio of -0.11 for the year to December 2020. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of CN¥147m, well over the CN¥92.5m it reported in profit. JiaXing Gas Group shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On JiaXing Gas Group's Profit Performance

JiaXing Gas Group's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think JiaXing Gas Group's 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 27% per year over the last three years. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Every company has risks, and we've spotted 2 warning signs for JiaXing Gas Group (of which 1 can't be ignored!) you should know about.

This note has only looked at a single factor that sheds light on the nature of JiaXing Gas Group's 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. 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 that insiders are buying to be useful.

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