Tianjin Tianyao Pharmaceuticals (SHSE:600488) Is Posting Promising Earnings But The Good News Doesn’t Stop There

The market seemed underwhelmed by last week's earnings announcement from Tianjin Tianyao Pharmaceuticals Co., Ltd. (SHSE:600488) despite the healthy numbers. We did some analysis to find out why and believe that investors might be missing some encouraging factors contained in the earnings.

See our latest analysis for Tianjin Tianyao Pharmaceuticals

Zooming In On Tianjin Tianyao Pharmaceuticals' 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. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Tianjin Tianyao Pharmaceuticals has an accrual ratio of -0.13 for the year to September 2024. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of CN¥678m in the last year, which was a lot more than its statutory profit of CN¥152.0m. Tianjin Tianyao Pharmaceuticals' free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Tianjin Tianyao Pharmaceuticals.

Our Take On Tianjin Tianyao Pharmaceuticals' Profit Performance

As we discussed above, Tianjin Tianyao Pharmaceuticals has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Tianjin Tianyao Pharmaceuticals' statutory profit actually understates its earnings potential! And the EPS is up 13% over the last twelve months. 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 Tianjin Tianyao Pharmaceuticals as a business, it's important to be aware of any risks it's facing. Our analysis shows 2 warning signs for Tianjin Tianyao Pharmaceuticals (1 doesn't sit too well with us!) and we strongly recommend you look at them before investing.

This note has only looked at a single factor that sheds light on the nature of Tianjin Tianyao Pharmaceuticals' profit. But there are plenty of other ways to inform your opinion of a company. 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 with high insider ownership.

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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.