When companies post strong earnings, the stock generally performs well, just like China Nonferrous Metal Industry's Foreign Engineering and Construction Co.,Ltd.'s (SZSE:000758) stock has recently. We have done some analysis, and we found several positive factors beyond the profit numbers.

Examining Cashflow Against China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd'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.

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. 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.

For the year to December 2023, China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd had an accrual ratio of -0.14. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of CN¥1.9b in the last year, which was a lot more than its statutory profit of CN¥359.1m. China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd'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 China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd.

Our Take On China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd's Profit Performance

As we discussed above, China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd has perfectly satisfactory free cash flow relative to profit. Because of this, we think China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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. Just as investors must consider earnings, it is also important to take into account the strength of a company's balance sheet. You can see our latest analysis on China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd's balance sheet health here.

This note has only looked at a single factor that sheds light on the nature of China Nonferrous Metal Industry's Foreign Engineering and ConstructionLtd'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.