Cabio Biotech (Wuhan)'s (SHSE:688089) Promising Earnings May Rest On Soft Foundations

Cabio Biotech (Wuhan) Co., Ltd.'s (SHSE:688089) stock was strong after they recently reported robust earnings. However, we think that shareholders may be missing some concerning details in the numbers.

Check out our latest analysis for Cabio Biotech (Wuhan)

Zooming In On Cabio Biotech (Wuhan)'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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Cabio Biotech (Wuhan) has an accrual ratio of 0.23 for the year to March 2024. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of CN¥101.4m, a look at free cash flow indicates it actually burnt through CN¥169m in the last year. We also note that Cabio Biotech (Wuhan)'s free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥169m. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

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.

How Do Unusual Items Influence Profit?

Unfortunately (in the short term) Cabio Biotech (Wuhan) saw its profit reduced by unusual items worth CN¥12m. If this was a non-cash charge, it would have made the accrual ratio better, if cashflow had stayed strong, so it's not great to see in combination with an uninspiring accrual ratio. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Cabio Biotech (Wuhan) to produce a higher profit next year, all else being equal.

Our Take On Cabio Biotech (Wuhan)'s Profit Performance

Cabio Biotech (Wuhan) saw unusual items weigh on its profit, which should have made it easier to show high cash conversion, which it did not do, according to its accrual ratio. Based on these factors, it's hard to tell if Cabio Biotech (Wuhan)'s profits are a reasonable reflection of its underlying profitability. If you'd like to know more about Cabio Biotech (Wuhan) as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 3 warning signs for Cabio Biotech (Wuhan) you should be mindful of and 1 of these is potentially serious.

Our examination of Cabio Biotech (Wuhan) has focussed on certain factors that can make its earnings look better than they are. 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 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.