When companies post strong earnings, stocks generally perform well, just like The company Yangzijiang Shipbuilding (Holdings) Ltd. (SGX:BS6) has recently recovered. Our analysis revealed other factors that we believe are good for shareholders.
Check out our latest analysis for Yangzijiang Shipbuilding (Holdings)
Consideration of cash flow versus earnings of Yangzijiang Shipbuilding (Holdings)
An important financial metric that measures how well a company converts its profit into free cash flow (FCF) is the Delimitation ratio. The accrual ratio subtracts FCF from profit for a given period and divides the result by the company’s average funds from operations for that period. This ratio indicates how much of a company’s profit is not covered by free cash flow.
This means that a negative accrual ratio is a good thing because it shows that the company is generating more free cash flow than its earnings would suggest. This is not to say that we should be concerned about a positive accrual ratio, but it is worth noting when the accrual ratio is quite high. To quote a 2014 paper by Lewellen and Resutek, “Companies with higher accruals tend to be less profitable in the future.”
Yangzijiang Shipbuilding (Holdings) has an accrual ratio of -0.64 for the year to June 2024. This means that the company has very good cash conversion, and that its profit over the last year actually significantly understates its free cash flow. In fact, the company reported free cash flow of CN¥12 billion over the last twelve months, significantly more than the CN¥5.43 billion it reported as profit. Yangzijiang Shipbuilding (Holdings)’s free cash flow has improved over the last year, which is generally pleasing.
You may be 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 their estimates.
Our assessment of the earnings development of Yangzijiang Shipbuilding (Holdings)
As we discussed above, Yangzijiang Shipbuilding (Holdings)’s accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. For this reason, we believe Yangzijiang Shipbuilding (Holdings)’s underlying earnings potential is as good, or possibly even better, than its statutory profit suggests! And what’s more, its earnings per share have grown extremely impressively over the past three years. The goal of this article was to assess how well we can trust the statutory profit to reflect the company’s potential, but there’s a lot more to consider. Ultimately, this article has formed an opinion based on historical data. However, it can also be good to think about what analysts are forecasting for the future. At Simply Wall St, we have analyst estimates, which you can view here.
This note only examined a single factor that can provide insight into the nature of Yangzijiang Shipbuilding (Holdings)’s earnings. However, there are many other ways to form an opinion about a company. For example, many people consider a high return on equity to indicate a favorable business situation, while others like to “follow the money” and look for stocks that insiders are buying. You may want to check out free Collection of companies with high return on equity or this list of stocks with high insider ownership.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
