In This Article:
When companies post strong earnings, the stock generally performs well, just like Yangzijiang Shipbuilding (Holdings) Ltd.'s (SGX:BS6) stock has recently. Our analysis found some more factors that we think are good for shareholders.
Check out our latest analysis for Yangzijiang Shipbuilding (Holdings)
Examining Cashflow Against Yangzijiang Shipbuilding (Holdings)'s Earnings
One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. This ratio tells us how much of a company's profit is not backed by free cashflow.
That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, "firms 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. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of CN¥12b, well over the CN¥5.43b it reported in profit. Yangzijiang Shipbuilding (Holdings)'s free cash flow improved over the last year, which is generally good to see.
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 Yangzijiang Shipbuilding (Holdings)'s Profit Performance
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. Because of this, we think Yangzijiang Shipbuilding (Holdings)'s underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, 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. Ultimately, this article has formed an opinion based on historical data. However, it can also be great to think about what analysts are forecasting for the future. At Simply Wall St, we have analyst estimates which you can view by clicking here.