Unsurprisingly, Zhejiang Cayi Vacuum Container Co., Ltd.'s (SZSE:301004) stock price was strong on the back of its healthy earnings report. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.
Zooming In On Zhejiang Cayi Vacuum Container'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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
Zhejiang Cayi Vacuum Container has an accrual ratio of 0.33 for the year to December 2023. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. In fact, it had free cash flow of CN¥299m in the last year, which was a lot less than its statutory profit of CN¥472.0m. We note, however, that Zhejiang Cayi Vacuum Container grew its free cash flow over the last year.
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 Zhejiang Cayi Vacuum Container's Profit Performance
As we have made quite clear, we're a bit worried that Zhejiang Cayi Vacuum Container didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Zhejiang Cayi Vacuum Container's underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. If you'd like to know more about Zhejiang Cayi Vacuum Container as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 3 warning signs for Zhejiang Cayi Vacuum Container (of which 1 is a bit unpleasant!) you should know about.
This note has only looked at a single factor that sheds light on the nature of Zhejiang Cayi Vacuum Container'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.