Why Foshan Haitian Flavouring and Food's (SHSE:603288) Shaky Earnings Are Just The Beginning Of Its Problems

A lackluster earnings announcement from Foshan Haitian Flavouring and Food Company Ltd. (SHSE:603288) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

Check out our latest analysis for Foshan Haitian Flavouring and Food

Examining Cashflow Against Foshan Haitian Flavouring and Food'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). 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. 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to March 2024, Foshan Haitian Flavouring and Food had an accrual ratio of 0.49. That means it didn't generate anywhere near enough free cash flow to match its profit. Statistically speaking, that's a real negative for future earnings. Indeed, in the last twelve months it reported free cash flow of CN¥3.8b, which is significantly less than its profit of CN¥5.83b. Foshan Haitian Flavouring and Food shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down over the last twelve months.

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 Foshan Haitian Flavouring and Food's Profit Performance

As we discussed above, we think Foshan Haitian Flavouring and Food's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Foshan Haitian Flavouring and Food's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Sadly, its EPS was down over the last twelve months. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Our analysis shows 2 warning signs for Foshan Haitian Flavouring and Food (1 is significant!) and we strongly recommend you look at these before investing.

This note has only looked at a single factor that sheds light on the nature of Foshan Haitian Flavouring and Food'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. 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.

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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.