Concerns Surrounding Shandong Bailong Chuangyuan Bio-Tech's (SHSE:605016) Performance

The market for Shandong Bailong Chuangyuan Bio-Tech Co., Ltd.'s (SHSE:605016) stock was strong after it released a healthy earnings report last week. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.

See our latest analysis for Shandong Bailong Chuangyuan Bio-Tech

Examining Cashflow Against Shandong Bailong Chuangyuan Bio-Tech'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. 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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to March 2024, Shandong Bailong Chuangyuan Bio-Tech recorded an accrual ratio of 0.32. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Over the last year it actually had negative free cash flow of CN¥123m, in contrast to the aforementioned profit of CN¥202.1m. We also note that Shandong Bailong Chuangyuan Bio-Tech's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥123m.

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 Shandong Bailong Chuangyuan Bio-Tech's Profit Performance

As we have made quite clear, we're a bit worried that Shandong Bailong Chuangyuan Bio-Tech didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Shandong Bailong Chuangyuan Bio-Tech's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 46% per annum growth in EPS for the last three. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 1 warning sign for Shandong Bailong Chuangyuan Bio-Tech you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Shandong Bailong Chuangyuan Bio-Tech's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 that insiders are buying 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.