Investors Shouldn't Be Too Comfortable With Beijing Foyou PharmaLTD's (SHSE:601089) Earnings

Beijing Foyou Pharma CO.,LTD (SHSE:601089) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

Check out our latest analysis for Beijing Foyou PharmaLTD

Examining Cashflow Against Beijing Foyou PharmaLTD'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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to December 2023, Beijing Foyou PharmaLTD recorded an accrual ratio of 0.34. 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. To wit, it produced free cash flow of CN¥190m during the period, falling well short of its reported profit of CN¥488.8m. Beijing Foyou PharmaLTD shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down over the last twelve months. One positive for Beijing Foyou PharmaLTD shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Beijing Foyou PharmaLTD.

Our Take On Beijing Foyou PharmaLTD's Profit Performance

As we discussed above, we think Beijing Foyou PharmaLTD's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Beijing Foyou PharmaLTD's underlying earnings power is lower than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 40% over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Beijing Foyou PharmaLTD as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 2 warning signs we've spotted with Beijing Foyou PharmaLTD (including 1 which is a bit concerning).

Today we've zoomed in on a single data point to better understand the nature of Beijing Foyou PharmaLTD'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.

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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.