Chuzhou Duoli Automotive Technology Co., Ltd.’s (SZSE:001311) healthy profit numbers didn’t contain any surprises for investors. However the statutory profit number doesn’t tell the whole story, and we have found some factors which might be of concern to shareholders.

See our latest analysis for Chuzhou Duoli Automotive Technology

Examining Cashflow Against Chuzhou Duoli Automotive Technology’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. The ratio shows us how much a company’s profit exceeds its FCF.

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. While having an accrual ratio above zero is of little concern, we do think it’s worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to December 2023, Chuzhou Duoli Automotive Technology had an accrual ratio of 0.33. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Over the last year it actually had negative free cash flow of CN¥432m, in contrast to the aforementioned profit of CN¥496.6m. We also note that Chuzhou Duoli Automotive Technology’s free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥432m.

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 Chuzhou Duoli Automotive Technology’s Profit Performance

As we have made quite clear, we’re a bit worried that Chuzhou Duoli Automotive Technology didn’t back up the last year’s profit with free cashflow. As a result, we think it may well be the case that Chuzhou Duoli Automotive Technology’s underlying earnings power is lower 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. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company’s potential, but there is plenty more to consider. In light of this, if you’d like to do more analysis on the company, it’s vital to be informed of the risks involved. For example, we’ve found that Chuzhou Duoli Automotive Technology has 2 warning signs (1 doesn’t sit too well with us!) that deserve your attention before going any further with your analysis.

This note has only looked at a single factor that sheds light on the nature of Chuzhou Duoli Automotive Technology’s profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to ‘follow the money’ and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.