Jiangsu Sinopep-Allsino Biopharmaceutical's (SHSE:688076) Shareholders May Want To Dig Deeper Than Statutory Profit

The stock price didn't jump after Jiangsu Sinopep-Allsino Biopharmaceutical Co., Ltd. (SHSE:688076) posted decent earnings last week. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

View our latest analysis for Jiangsu Sinopep-Allsino Biopharmaceutical

Zooming In On Jiangsu Sinopep-Allsino Biopharmaceutical'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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.

For the year to December 2023, Jiangsu Sinopep-Allsino Biopharmaceutical had an accrual ratio of 0.23. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of CN¥162.9m, a look at free cash flow indicates it actually burnt through CN¥310m in the last year. We also note that Jiangsu Sinopep-Allsino Biopharmaceutical's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥310m. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

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) Jiangsu Sinopep-Allsino Biopharmaceutical saw its profit reduced by unusual items worth CN¥28m. In the case where this was a non-cash charge it would have made it easier to have high cash conversion, so it's surprising that the accrual ratio tells a different story. 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 that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Jiangsu Sinopep-Allsino Biopharmaceutical to produce a higher profit next year, all else being equal.

Our Take On Jiangsu Sinopep-Allsino Biopharmaceutical's Profit Performance

In conclusion, Jiangsu Sinopep-Allsino Biopharmaceutical's accrual ratio suggests that its statutory earnings are not backed by cash flow, even though unusual items weighed on profit. Based on these factors, it's hard to tell if Jiangsu Sinopep-Allsino Biopharmaceutical's profits are a reasonable reflection of its underlying profitability. 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. While conducting our analysis, we found that Jiangsu Sinopep-Allsino Biopharmaceutical has 1 warning sign and it would be unwise to ignore it.

Our examination of Jiangsu Sinopep-Allsino Biopharmaceutical has focussed on certain factors that can make its earnings look better than they are. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.