Impressive Earnings May Not Tell The Whole Story For Jiangsu Jibeier Pharmaceutical (SHSE:688566)

Despite posting some strong earnings, the market for Jiangsu Jibeier Pharmaceutical Co., Ltd.'s (SHSE:688566) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for Jiangsu Jibeier Pharmaceutical

A Closer Look At Jiangsu Jibeier Pharmaceutical'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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to March 2024, Jiangsu Jibeier Pharmaceutical recorded an accrual ratio of 0.38. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of CN¥148m, in contrast to the aforementioned profit of CN¥233.6m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CN¥148m, this year, indicates high risk.

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 Jibeier Pharmaceutical's Profit Performance

As we discussed above, we think Jiangsu Jibeier Pharmaceutical's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Jiangsu Jibeier Pharmaceutical's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate 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 Jiangsu Jibeier Pharmaceutical as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Jiangsu Jibeier Pharmaceutical has 1 warning sign and it would be unwise to ignore this.

This note has only looked at a single factor that sheds light on the nature of Jiangsu Jibeier Pharmaceutical'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 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.