Jiangsu Lead Micro-Nano Equipment Technology (SHSE:688147)'s solid profits reflect weak fundamentals

Jiangsu Lead Micro Nano Equipment Technology Co., Ltd. (SHSE:688147) reported strong profits, but the stock price was weak. Our analysis suggests that shareholders notice something concerning in the numbers.

Check out our latest analysis on Jiangsu Lead Micro-Nano Equipment Technology.

Focus on Jiangsu Leadmicro Nano-Equipment Technology's earnings

One of the key financial ratios used to measure how well a company converts its profits into free cash flow (FCF). Incidence. The accrual ratio subtracts his FCF from the profit for a particular period and divides the result by the company's average operating assets for that period. This ratio indicates how much of a company's profits are not backed by free cash flow.

So if a company has a negative accrual ratio, it's actually a good thing, and if the accrual ratio is positive, it's a bad thing. This does not suggest that you need to worry about positive accruals, but it is worth noting if the accruals are fairly high. 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 ending March 2024, Jiangsu Lead Micro Nano Equipment Technology had an accrual ratio of 0.49. Statistically speaking, this is very negative for future returns. And in fact, the company didn't generate any free cash flow during this period. Although it reported a profit of CA$275.1m, a look at its free cash flow shows that it actually burned through CA$575.0m last year. However, Jiangsu Lead Micro-Nano Equipment Technology has been able to generate at least positive FCF in the past, as its FCF was CA$116 million a year ago. However, that's not the only thing to consider. The accrual rate reflects, at least in part, the impact of unusual items on statutory profit. The good news for shareholders is that Jiangsu Reed Micro Nano Equipment Technology Co.'s accruals were much better last year, so this year's bad numbers may simply be a case of short-term mismatch between earnings and FCF. do not have. If that's the case, shareholders should expect improved cash flow compared to this year's profits.

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.

Impact of abnormal items on profit

Unfortunately (in the short term) Jiangsu Lead Micro-Nano Equipment Technology suffered a decline in profits due to abnormal products worth CAD 80 million. 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. Losing points for unusual items is disappointing at first, but there is a silver lining. We looked at thousands of publicly traded companies and found that very often rare products are essentially one-offs. And after all, that's exactly what the accounting term means. If Jiangsu Lead Micro-Nano Equipment Technology does not experience a repeat of these unusual expenses, it is expected that its profits will increase next year, all else being equal.

Our view on Jiangsu Lead Micro-Nano Equipment Technology's revenue performance

At Jiangsu Lead Micro-Nano Equipment Technology, abnormal items were weighing down profits, which should have facilitated high cash conversion, but according to the accrual rate, this was not the case. Considering these factors, we don't think Jiangsu Lead Micro-Nano Equipment Technology's statutory profits cast an overly harsh view on the business. With this in mind, you should not consider investing in stocks unless you fully understand the risks.You want to know, what we found 1 Warning Sign for Jiangsu Lead Micro-Nano Equipment Technology And you'll want to know about it.

Our research on Jiangsu Lead Micro-Nano Equipment Technology focused on certain factors that could make the company's 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.