Kunshan GuoLi Electronic Technology Co., Ltd.'s (SHSE:688103) stock showed strength after its weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

See our latest analysis for Kunshan GuoLi Electronic Technology

Zooming In On Kunshan GuoLi Electronic Technology's 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Kunshan GuoLi Electronic Technology has an accrual ratio of 0.20 for the year to March 2022. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of CN¥75.9m, a look at free cash flow indicates it actually burnt through CN¥12m in the last year. We also note that Kunshan GuoLi Electronic Technology's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥12m.

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 Kunshan GuoLi Electronic Technology's Profit Performance

Kunshan GuoLi Electronic Technology's 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 Kunshan GuoLi Electronic Technology's true underlying earnings power is actually less than its statutory profit. Sadly, its EPS was down over the last twelve months. 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. When we did our research, we found 4 warning signs for Kunshan GuoLi Electronic Technology (1 makes us a bit uncomfortable!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of Kunshan GuoLi Electronic Technology'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 that insiders are buying 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.