Solid Earnings Reflect Sichuan Biokin PharmaceuticalLtd's (SHSE:688506) Strength As A Business

Sichuan Biokin Pharmaceutical Co.,Ltd. (SHSE:688506) just reported healthy earnings but the stock price didn't move much. Our analysis suggests that investors might be missing some promising details.

Check out our latest analysis for Sichuan Biokin PharmaceuticalLtd

A Closer Look At Sichuan Biokin 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. 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 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.

Sichuan Biokin PharmaceuticalLtd has an accrual ratio of -1.15 for the year to September 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥4.3b, well over the CN¥3.80b it reported in profit. Notably, Sichuan Biokin PharmaceuticalLtd had negative free cash flow last year, so the CN¥4.3b it produced this year was a welcome improvement.

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 Sichuan Biokin PharmaceuticalLtd's Profit Performance

As we discussed above, Sichuan Biokin PharmaceuticalLtd's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Sichuan Biokin PharmaceuticalLtd's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. 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 Sichuan Biokin PharmaceuticalLtd as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 1 warning sign for Sichuan Biokin PharmaceuticalLtd you should know about.

Today we've zoomed in on a single data point to better understand the nature of Sichuan Biokin PharmaceuticalLtd's 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. 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 with significant insider holdings 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.