DongGuan Winnerway Industry Zone LTD.'s (SZSE:000573 ) stock didn't jump after it announced some healthy earnings. We did some digging and believe investors may be worried about some underlying factors in the report.

Zooming In On DongGuan Winnerway Industry Zone'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

DongGuan Winnerway Industry Zone has an accrual ratio of 0.23 for the year to December 2023. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥320m despite its profit of CN¥66.1m, mentioned above. We also note that DongGuan Winnerway Industry Zone's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥320m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of DongGuan Winnerway Industry Zone.

Our Take On DongGuan Winnerway Industry Zone's Profit Performance

DongGuan Winnerway Industry Zone's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that DongGuan Winnerway Industry Zone's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 58% EPS growth in the last year. 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 DongGuan Winnerway Industry Zone as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with DongGuan Winnerway Industry Zone (including 2 which are concerning).

This note has only looked at a single factor that sheds light on the nature of DongGuan Winnerway Industry Zone'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.