Soft earnings didn't appear to concern Yuhuan CNC Machine Tool Co.,Ltd.'s (SZSE:002903) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

A Closer Look At Yuhuan CNC Machine ToolLtd'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. The ratio shows us how much a company's profit exceeds its FCF.

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.

For the year to December 2023, Yuhuan CNC Machine ToolLtd had an accrual ratio of -0.17. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of CN¥118m, well over the CN¥40.1m it reported in profit. Yuhuan CNC Machine ToolLtd's free cash flow improved over the last year, which is generally good to see.

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 Yuhuan CNC Machine ToolLtd's Profit Performance

Happily for shareholders, Yuhuan CNC Machine ToolLtd produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Yuhuan CNC Machine ToolLtd's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Unfortunately, though, its earnings per share actually fell back over 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 want to do dive deeper into Yuhuan CNC Machine ToolLtd, you'd also look into what risks it is currently facing. At Simply Wall St, we found 4 warning signs for Yuhuan CNC Machine ToolLtd and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Yuhuan CNC Machine ToolLtd'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.