Diagnostic Study On The Earnings Quality Of GS Company

GS Company is a listed company dedicated to manufacturing wind turbine generator system and investing in new energy power stations.From 2018 to the first half of 2019,the company’s operating income and net profit increased significantly,while its operating cash flow decreased and the balance of accounts receivable increased;government subsidies and tax incentives accounted for more than 40% of profit,subsidiaries suffered serious losses,the gross margin of its wind turbine generator system fell and asset-liability ratios approached 80%,the earnings quality has become the focus of investors.Is there any problem with the earnings quality of GS Company? This article diagnoses the earnings quality of GS Company aimed at the external(financial media)suspicions and provides a reference for the investors.This article first analyzes the current situation of the wind power industry and GS Company,summarizes the external suspicions of GS Company,in order to understand the industry environment,the company’s business status and its development direction,so as to determine the diagnosis perspectives and comparative objects;then,on the basis of the company’s operating cash flow characteristics,this article selects appropriate diagnostic indicators,based on the financial data form 2015 to the first half of 2019,uses financial index analysis,trend analysis,and other methods to diagnose the authenticity and cash-ensurance of GS’s profit,and compares with Goldwind Technology and Yunda Co.,Ltd.;next,diagnoses the stability and growth of GS’s profit,combined with the industry environment and the company’s internal environment,diagnoses the sability of the profit composition,the stability and growth of the subsidiaries,wind turbine generator system business,and the new energy power plant business,and analyzes the impacts of the debt on the stability and growth,and horizontally compares with Goldwind Technology;finally,puts forward suggestions for GS Company to improve its earnings quality based on the diagnosis results,and gives advice for earnings quality diagnosis.The research in this paper shows that:(1)In terms of the cash-ensurance,from the perspective of the ability to convert accounting profits into cash,the profits of GS companies are gradually converted into cash recovery over time,so the cash-ensurance is good;due to the long construction cycle of the industry and the company adopts the installment payment policy,the balance of accounts receivable is high.Although the accounts receivable can be recovered,there is still the risk of further extension of the collection time or even bad debts,which may adversely affect the company’s cash flow.(2)In terms of the authenticity,GS’s account receivables are recovered well,the bad debt provision is reasonable,so the authenticity is highly reliable.(3)In terms of the earnings stability,the company’s business model can reduce the profit fluctuations caused by the industry environment,and the profit stability is good;but the company’s financial leverage factor is higher than 3,so financial risk is high.(4)In terms of the growth of the earnings,the company has strong wind turbine technology research and development strength,sufficient power station project reserves,so the growth of the earnings is good;but the potential risk is that if the development of the new energy power stations fails to meet expectations,it may drag down the company’s overall performance.(5)The doubts in the outside world stem from the misjudgment of the earnings quality of GS.The reason for the misjudgment is that the outside world did not choose the evaluation criteria based on the characteristics of the wind power industry,and selected the wrong evaluation criteria for stability and wrong caliber of calculating the asset-liability ratio is wrong,and they did not combine the company’s specific business when analyzing.This article put forward suggestions to GS from three aspects: accelerating the development of EPC business and strengthening the project management,rational planning the power plant transfer time and revenue,and using the account receivable financing to reduce the debt ratio.At the same time,this article suggests that diagnosing the quality of profitability should clarify the evaluation criteria of cash-ensure and stability,consider the applicability of indicators,and combine the company’s specific business when analyzing.