We Think That There Are Some Issues For Jiangsu King's Luck Brewery Ltd (SHSE:603369) Beyond Its Promising Earnings

The market shrugged off Jiangsu King's Luck Brewery Joint-Stock Co.,Ltd.'s (SHSE:603369) solid earnings report. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

View our latest analysis for Jiangsu King's Luck Brewery Ltd

Examining Cashflow Against Jiangsu King's Luck Brewery Ltd's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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 March 2024, Jiangsu King's Luck Brewery Ltd had an accrual ratio of 0.48. That means it didn't generate anywhere near enough free cash flow to match its profit. As a general rule, that bodes poorly for future profitability. Indeed, in the last twelve months it reported free cash flow of CN¥508m, which is significantly less than its profit of CN¥3.41b. Jiangsu King's Luck Brewery Ltd 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 Jiangsu King's Luck Brewery Ltd's Profit Performance

As we have made quite clear, we're a bit worried that Jiangsu King's Luck Brewery Ltd didn't back up the last year's profit with free cashflow. For this reason, we think that Jiangsu King's Luck Brewery Ltd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. If you'd like to know more about Jiangsu King's Luck Brewery Ltd as a business, it's important to be aware of any risks it's facing. For example, Jiangsu King's Luck Brewery Ltd has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of Jiangsu King's Luck Brewery Ltd'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.

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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.