The recent earnings posted by Jiangsu Guomao Reducer Co., Ltd. (SHSE:603915) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

Check out our latest analysis for Jiangsu Guomao Reducer

A Closer Look At Jiangsu Guomao Reducer'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Jiangsu Guomao Reducer has an accrual ratio of 0.34 for the year to March 2022. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Over the last year it actually had negative free cash flow of CN¥18m, in contrast to the aforementioned profit of CN¥447.3m. We saw that FCF was CN¥98m a year ago though, so Jiangsu Guomao Reducer has at least been able to generate positive FCF in the past.

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 Jiangsu Guomao Reducer's Profit Performance

As we have made quite clear, we're a bit worried that Jiangsu Guomao Reducer didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Jiangsu Guomao Reducer's underlying earnings power is lower than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 60% 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. If you'd like to know more about Jiangsu Guomao Reducer as a business, it's important to be aware of any risks it's facing. For instance, we've identified 3 warning signs for Jiangsu Guomao Reducer (1 shouldn't be ignored) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Jiangsu Guomao Reducer'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. 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.