The market shrugged off Huizhou Desay SV Automotive Co., Ltd.'s (SZSE:002920) solid earnings report. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.
Zooming In On Huizhou Desay SV Automotive'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.
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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
Over the twelve months to March 2024, Huizhou Desay SV Automotive recorded an accrual ratio of 0.22. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Even though it reported a profit of CN¥1.60b, a look at free cash flow indicates it actually burnt through CN¥107m in the last year. We also note that Huizhou Desay SV Automotive's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥107m.
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 Huizhou Desay SV Automotive's Profit Performance
Huizhou Desay SV Automotive'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. Therefore, it seems possible to us that Huizhou Desay SV Automotive's true underlying earnings power is actually less than its statutory profit. But on the bright side, 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. If you'd like to know more about Huizhou Desay SV Automotive as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 2 warning signs we've spotted with Huizhou Desay SV Automotive (including 1 which shouldn't be ignored).
This note has only looked at a single factor that sheds light on the nature of Huizhou Desay SV Automotive's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.