We Think You Should Be Aware Of Some Concerning Factors In Meihua International Medical Technologies' (NASDAQ:MHUA) Earnings

The recent earnings posted by Meihua International Medical Technologies Co., Ltd. (NASDAQ:MHUA) were solid, but the stock didn't move as much as we expected. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

View our latest analysis for Meihua International Medical Technologies

A Closer Look At Meihua International Medical Technologies' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Meihua International Medical Technologies has an accrual ratio of 0.24 for the year to December 2021. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of US$20.9m, a look at free cash flow indicates it actually burnt through US$905k in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of US$905k, this year, indicates high risk.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Meihua International Medical Technologies.

Our Take On Meihua International Medical Technologies' Profit Performance

Meihua International Medical Technologies' accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Therefore, it seems possible to us that Meihua International Medical Technologies' true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 35% 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. For example - Meihua International Medical Technologies has 2 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Meihua International Medical Technologies' profit. 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. 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.

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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.