NanJing Pharmaceutical's (SHSE:600713) Earnings Seem To Be Promising

Investors signalled that they were pleased with NanJing Pharmaceutical Company Limited's (SHSE:600713) most recent earnings report. This reaction by the market reaction is understandable when looking at headline profits and we have found some further encouraging factors.

See our latest analysis for NanJing Pharmaceutical

A Closer Look At NanJing Pharmaceutical'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. 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. 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. 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 September 2024, NanJing Pharmaceutical had an accrual ratio of -0.14. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of CN¥3.0b, well over the CN¥579.4m it reported in profit. Given that NanJing Pharmaceutical had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥3.0b would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of NanJing Pharmaceutical.

Our Take On NanJing Pharmaceutical's Profit Performance

As we discussed above, NanJing Pharmaceutical has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that NanJing Pharmaceutical's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 5.6% per year over the last three years. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 2 warning signs for NanJing Pharmaceutical you should know about.

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