Hainan Dorinda New Energy Technology (SZSE:002865)'s poor performance may be just the beginning of trouble

Hainan Dorinda New Energy Technology Co., Ltd. (SZSE:002865) Last week's earnings report included some soft numbers, disappointing investors. We've done our research and think there's some reassurance beneath the statutory profit figures.

See our latest analysis on Hainan Dorinda New Energy Technology.

Investigation of cash flow to revenue of Hainan Dorinda new energy technology

In high finance, a key ratio used to measure how well a company converts its reported profits into free cash flow (FCF) is: Incidence (from cash flow). Simply put, this ratio subtracts his FCF from his net income and divides that number by the company's average operating assets for the period. This ratio shows how much a company's profit exceeds its FCF.

As a result, a negative accrual rate is positive for the company and a positive accrual rate is negative. Although an accrual ratio greater than zero is rarely a problem, it may be considered noteworthy if a company has a relatively high accrual ratio. That's because some academic research suggests that high accrual ratios tend to lead to lower profits and lower profit growth rates.

For the twelve months to March 2024, Hainan Dorinda New Energy Technology recorded an accrual ratio of 0.21. Unfortunately, this means that free cash flow was significantly lower than reported profits. Although it reported a profit of CA$481.4m, a look at its free cash flow shows that it actually burned through CA$314m last year. We also note that Hainan Dorinda New Energy Technology's free cash flow was actually negative last year, so it's understandable that shareholders are concerned about a CA$314m outflow. That being said, there are still things to consider. In addition to being aware of the impact of a company issuing new shares, companies should also consider the impact of unusual items on statutory profits (and therefore accruals).

With that in mind, you might wonder what analysts are predicting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

One important aspect when assessing earnings quality is to examine how much a company is diluting shareholders. In fact, Hainan Dorinda New Energy Technology has increased the number of outstanding shares by 15% in the past 12 months through the issuance of new shares. As a result, net profits are now distributed among more shares. Celebrating net profit by ignoring dilution is like being happy that he only got one big pizza, but ignoring the fact that the pizza will be cut into many more slices. Click this link to check his EPS growth history for Hainan Drinda New Energy Technology.

Let's take a look at the impact of dilution on Hainan Dorinda New Energy Technology's earnings per share (EPS)

Unfortunately, due to a lack of data, it is not possible to know what the profits were three years ago. Looking at last year, profits were still down 54%.Unfortunately the income per share Falling even further, under At that point it was a full 58%. Therefore, dilution has a significant impact on shareholder returns.

In the long term, if the profitability of Hainan Dorinda new energy technology improves, per share If the stock price can rise, the stock price should also rise. But on the other hand, we wouldn't be too excited to see that earnings (not EPS) are improving. For the average individual shareholder, EPS is a good measure to see their hypothetical “share” of a company's profits.

Impact of abnormal items on profit

Hainan Dorinda New Energy Technology's earnings were affected by unusual items, which reduced profits by C$896 million over the past 12 months. If this was a non-cash expense, the accrual ratio would have been even better if cash flow had remained strong. Therefore, it is not a good idea to combine it with a less attractive accrual rate. It's never good to see a rare item hurt a company's profits, but on the positive side, things may improve sooner or later. Our analysis of the vast majority of publicly traded companies around the world shows that significant abnormal items often do not repeat. This is not surprising since these line items are considered rare. Hainan Dorinda New Energy Technology was hit pretty hard by abnormal items in his one year period ending March 2024. As a result, we can infer that the unusual items reduced statutory profit to a greater extent than it would have otherwise.

Our view on Hainan Dorinda new energy technology's revenue performance

In conclusion, Hainan Dorinda New Energy Technology's accrual ratio suggests that its statutory profit is not backed by cash flow. However, the fact that unusual items are actually hurting earnings could be an upside factor if those unusual items don't recur. On top of that, dilution means that shareholders own a smaller percentage of the company. Considering these factors, we don't think Hainan Dorinda New Energy Technology's statutory profits cast an overly harsh view on the business. Therefore, while the quality of earnings is important, it is equally important to consider the risks facing Hainan Dorinda New Energy Technology at this time. For example, Hainan Dorinda new energy technology 4 warning signs (1 is a bit of a concern!) Please note this before proceeding with your analysis.

Our research on Hainan Dorinda New Energy Technology focused on certain factors that could make its earnings look better than they actually are. But there are many other ways to communicate your opinion about a company. Some consider a high return on equity to be a good sign of a high-quality business.So you might want to see this free A collection of companies with a high return on equity, or a list of stocks that insiders are buying.

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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.