Eyebright Medical Technology (Beijing)'s (SHSE:688050) Profits May Not Reveal Underlying Issues

The market for Eyebright Medical Technology (Beijing) Co., Ltd.'s (SHSE:688050) stock was strong after it released a healthy earnings report last week. While the profit numbers were good, our analysis has found some concerning factors that shareholders should be aware of.

View our latest analysis for Eyebright Medical Technology (Beijing)

Examining Cashflow Against Eyebright Medical Technology (Beijing)'s Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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".

Eyebright Medical Technology (Beijing) has an accrual ratio of 0.29 for the year to March 2024. 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¥208m, in contrast to the aforementioned profit of CN¥328.5m. We also note that Eyebright Medical Technology (Beijing)'s free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥208m.

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 Eyebright Medical Technology (Beijing)'s Profit Performance

Eyebright Medical Technology (Beijing) didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Eyebright Medical Technology (Beijing)'s statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. If you'd like to know more about Eyebright Medical Technology (Beijing) as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Eyebright Medical Technology (Beijing), and understanding it should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Eyebright Medical Technology (Beijing)'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.