Raymond Industrial Limited's (HKG:229) recent earnings report didn't offer any surprises, with the shares unchanged over the last week. We did some analysis to find out why and believe that investors might be missing some encouraging factors contained in the earnings.

Check out our latest analysis for Raymond Industrial

Examining Cashflow Against Raymond Industrial'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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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.

Raymond Industrial has an accrual ratio of -0.19 for the year to June 2023. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of HK$107m in the last year, which was a lot more than its statutory profit of HK$47.5m. Raymond Industrial's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Raymond Industrial.

Our Take On Raymond Industrial's Profit Performance

Happily for shareholders, Raymond Industrial produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Raymond Industrial's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 15% over the last twelve months. 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. So while earnings quality is important, it's equally important to consider the risks facing Raymond Industrial at this point in time. Case in point: We've spotted 2 warning signs for Raymond Industrial you should be mindful of and 1 of these is significant.

This note has only looked at a single factor that sheds light on the nature of Raymond Industrial's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.