Despite Nanjing Wavelength Opto-Electronic Science & Technology Co.,Ltd.'s (SZSE:301421) recent earnings report having lackluster headline numbers, the market responded positively. We think that shareholders might be missing some concerning factors that our analysis found.

Zooming In On Nanjing Wavelength Opto-Electronic Science & TechnologyLtd'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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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.

Over the twelve months to March 2024, Nanjing Wavelength Opto-Electronic Science & TechnologyLtd recorded an accrual ratio of 0.34. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥80m despite its profit of CN¥54.6m, mentioned above. We also note that Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥80m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Nanjing Wavelength Opto-Electronic Science & TechnologyLtd.

Our Take On Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's Profit Performance

As we discussed above, we think Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. In further bad news, its earnings per share decreased in the last year. 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. If you'd like to know more about Nanjing Wavelength Opto-Electronic Science & TechnologyLtd as a business, it's important to be aware of any risks it's facing. Our analysis shows 3 warning signs for Nanjing Wavelength Opto-Electronic Science & TechnologyLtd (1 is significant!) and we strongly recommend you look at them before investing.

This note has only looked at a single factor that sheds light on the nature of Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's 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. 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.