Jiangsu Leadmicro Nano-Equipment Technology (SHSE:688147) Solid Earnings Have Weak Fundamentals
Jiangsu Leadmicro Nano-Equipment Technology Ltd (SHSE:688147) announced strong earnings, but shares were stagnant. Our analysis suggests that shareholders noticed something worrying about the numbers.
See our latest analysis for Jiangsu Leadmicro Nano-Equipment Technology
Expanding Earnings of Jiangsu Leadmicro Nano-Equipment Technology
An important financial ratio used to measure how well a company converts its profit into free cash flow (FCF) is the accumulation rate. The accrual ratio subtracts FCF from profit for a given period and divides the result by the company’s average operating assets for that period. This ratio tells us how much of a company’s profit is not backed by free cash flow.
Therefore, it is actually considered good when a company has a negative accrual ratio, but it is bad if its accrual ratio is positive. This doesn’t mean we should worry about a positive accrual ratio, but it’s worth noting where the accrual ratio is quite high. This is because some academic studies have suggested that high accrual ratios tend to lead to lower profits or lower earnings growth.
Over the twelve months to March 2024, Jiangsu Leadmicro Nano-Equipment Technology recorded an accrual ratio of 0.49. Statistically speaking, this is actually negative for future profits. And in fact, during the period the company did not produce any free cash flow. Although it reported a profit of CN¥275.1m, a look at its free cash flow indicates that it actually burned through CN¥575m last year. We saw that FCF was CN¥116 million a year ago, so Jiangsu Leadmicro Nano-Equipment Technology has at least managed to generate positive FCF in the past. However, that’s not all there is to consider. The accrual ratio reflects the impact of unusual items on statutory profit, at least in part. The good news for shareholders is that Jiangsu Leadmicro Nano-Equipment Technology’s accrual ratio was much better last year, so this year’s poor reading could simply be a case of a short-term mismatch between earnings and FCF. Shareholders should look for better cash flow relative to profit in the current year, if that is indeed the case.
This may leave you wondering what analysts are predicting in terms of future profitability. Fortunately, you can click here to see an interactive chart depicting future profitability, based on your estimates.
The impact of unusual items on profit
Unfortunately (in the short term) Jiangsu Leadmicro Nano-Equipment Technology saw its profit reduced by unusual items worth CN¥80 million. If this had been a non-cash charge it would have improved the accrual ratio if cash flow had remained strong, so it is not good to see this in combination with an uninspiring accrual ratio. While deductions due to unusual items are disappointing at first, there is a silver lining. We analyze thousands of listed companies and find that unusual items are often unique in nature. And, after all, that is exactly what accounting terminology implies. If Jiangsu Leadmicro Nano-Equipment Technology doesn’t see these unusual expenses recurring, then, all else being equal, we would expect its profit to increase next year.
Our Take on Jiangsu Leadmicro Nano-Equipment Technology’s Profitable Performance
Jiangsu Leadmicro Nano-Equipment Technology saw unusual items weigh on its profit, which should have made it easier to report high cash conversion, which it did not, according to its accrual ratio. Having considered these factors, we don’t believe Jiangsu Leadmicro Nano-Equipment Technology’s statutory profits provide an overly harsh view of the business. With this in mind, we wouldn’t consider investing in a stock unless we had an in-depth understanding of the risks. Would you be interested to know that we found 1 warning sign for Jiangsu Leadmicro nanoequipment technology and you’ll want to know about it.
Our examination of Jiangsu Leadmicro Nano-Equipment Technology focused on certain factors that can make its earnings look better than they are. But there are many 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. So you might want to see this free collection of companies with high return on equity or this list of stocks that insiders are buying.
Assessment is complex, but we are helping to make it simple.
Find out whether Jiangsu Leadmicro nanoequipment technology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and caveats, dividends, insider transactions and financial health.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your objectives or financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.
