Stock Analysis

Shareholders Can Be Confident That Jiangsu Kanion PharmaceuticalLtd's (SHSE:600557) Earnings Are High Quality

SHSE:600557
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Even though Jiangsu Kanion Pharmaceutical Co.,Ltd. (SHSE:600557 ) posted strong earnings, investors appeared to be underwhelmed. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

View our latest analysis for Jiangsu Kanion PharmaceuticalLtd

earnings-and-revenue-history
SHSE:600557 Earnings and Revenue History April 25th 2024

A Closer Look At Jiangsu Kanion PharmaceuticalLtd's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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.

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.

Jiangsu Kanion PharmaceuticalLtd has an accrual ratio of -0.12 for the year to March 2024. 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¥924m, well over the CN¥543.3m it reported in profit. Jiangsu Kanion PharmaceuticalLtd shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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 Jiangsu Kanion PharmaceuticalLtd's Profit Performance

As we discussed above, Jiangsu Kanion PharmaceuticalLtd has perfectly satisfactory free cash flow relative to profit. Because of this, we think Jiangsu Kanion PharmaceuticalLtd's earnings potential is at least as good as it seems, and maybe even better! Better yet, its EPS are growing strongly, which is nice to see. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 1 warning sign with Jiangsu Kanion PharmaceuticalLtd, and understanding this should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Jiangsu Kanion PharmaceuticalLtd's profit. 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. 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.

Valuation is complex, but we're helping make it simple.

Find out whether Jiangsu Kanion PharmaceuticalLtd is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.