The market seemed underwhelmed by last week's earnings announcement from Hubei Jianghan New Materials Co., Ltd. (SHSE:603281) despite the healthy numbers. 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 Hubei Jianghan New Materials
Examining Cashflow Against Hubei Jianghan New Materials' Earnings
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
Hubei Jianghan New Materials has an accrual ratio of -0.12 for the year to March 2023. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of CN¥984m in the last year, which was a lot more than its statutory profit of CN¥891.3m. Hubei Jianghan New Materials shareholders are no doubt pleased that free cash flow improved over the last twelve months.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hubei Jianghan New Materials.
Our Take On Hubei Jianghan New Materials' Profit Performance
Hubei Jianghan New Materials' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Hubei Jianghan New Materials' earnings potential is at least as good as it seems, and maybe even better! On the other hand, its EPS actually shrunk in the last twelve months. 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. Just as investors must consider earnings, it is also important to take into account the strength of a company's balance sheet. If you're interested we have a graphic representation of Hubei Jianghan New Materials' balance sheet.
This note has only looked at a single factor that sheds light on the nature of Hubei Jianghan New Materials' 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. 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.