FuJian YanJing HuiQuan BreweryLtd (SHSE:600573) Is Posting Promising Earnings But The Good News Doesn’t Stop There

FuJian YanJing HuiQuan Brewery Co.,Ltd's (SHSE:600573) recent earnings report didn't offer any surprises, with the shares unchanged over the last week. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.

See our latest analysis for FuJian YanJing HuiQuan BreweryLtd

Examining Cashflow Against FuJian YanJing HuiQuan BreweryLtd's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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.

Over the twelve months to June 2024, FuJian YanJing HuiQuan BreweryLtd recorded an accrual ratio of -0.12. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of CN¥73m in the last year, which was a lot more than its statutory profit of CN¥57.8m. FuJian YanJing HuiQuan BreweryLtd's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of FuJian YanJing HuiQuan BreweryLtd.

Our Take On FuJian YanJing HuiQuan BreweryLtd's Profit Performance

FuJian YanJing HuiQuan BreweryLtd's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that FuJian YanJing HuiQuan BreweryLtd's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. While earnings are important, another area to consider is the balance sheet. You can see our latest analysis on FuJian YanJing HuiQuan BreweryLtd's balance sheet health here.

Today we've zoomed in on a single data point to better understand the nature of FuJian YanJing HuiQuan BreweryLtd's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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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.