We Think Panda Dairy's (SZSE:300898) Solid Earnings Are Understated

The market seemed underwhelmed by last week's earnings announcement from Panda Dairy Corporation (SZSE:300898) despite the healthy numbers. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.

View our latest analysis for Panda Dairy

A Closer Look At Panda Dairy's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. The ratio shows us how much a company's profit exceeds its FCF.

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 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.

Panda Dairy has an accrual ratio of -0.15 for the year to June 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of CN¥190m during the period, dwarfing its reported profit of CN¥109.2m. Panda Dairy's free cash flow improved over the last year, which is generally good to see.

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 Panda Dairy's Profit Performance

As we discussed above, Panda Dairy has perfectly satisfactory free cash flow relative to profit. Because of this, we think Panda Dairy's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share increased by 42% in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Panda Dairy, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for Panda Dairy and you'll want to know about this.

Today we've zoomed in on a single data point to better understand the nature of Panda Dairy'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.