Weak Statutory Earnings May Not Tell The Whole Story For Zhejiang Shouxiangu Pharmaceutical (SHSE:603896)

Zhejiang Shouxiangu Pharmaceutical Co., Ltd.'s (SHSE:603896) stock showed strength, with investors undeterred by its weak earnings report. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Zhejiang Shouxiangu Pharmaceutical.

View our latest analysis for Zhejiang Shouxiangu Pharmaceutical

Zooming In On Zhejiang Shouxiangu 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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 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.

Over the twelve months to March 2024, Zhejiang Shouxiangu Pharmaceutical recorded an accrual ratio of 0.43. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of CN¥256m, in contrast to the aforementioned profit of CN¥269.0m. We saw that FCF was CN¥172m a year ago though, so Zhejiang Shouxiangu Pharmaceutical has at least been able to generate positive FCF in the past.

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 Zhejiang Shouxiangu Pharmaceutical's Profit Performance

As we have made quite clear, we're a bit worried that Zhejiang Shouxiangu Pharmaceutical didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Zhejiang Shouxiangu Pharmaceutical's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 59% 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Case in point: We've spotted 3 warning signs for Zhejiang Shouxiangu Pharmaceutical you should be mindful of and 1 of these bad boys can't be ignored.

This note has only looked at a single factor that sheds light on the nature of Zhejiang Shouxiangu Pharmaceutical's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.