Investors Can Find Comfort In Changzhou Qianhong BiopharmaLTD's (SZSE:002550) Earnings Quality

Changzhou Qianhong Biopharma CO.,LTD's (SZSE:002550) recent soft profit numbers didn't appear to worry shareholders, as the stock price showed strength. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

Check out our latest analysis for Changzhou Qianhong BiopharmaLTD

Examining Cashflow Against Changzhou Qianhong BiopharmaLTD's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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

For the year to December 2023, Changzhou Qianhong BiopharmaLTD had an accrual ratio of -0.13. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. Indeed, in the last twelve months it reported free cash flow of CN¥433m, well over the CN¥181.9m it reported in profit. Given that Changzhou Qianhong BiopharmaLTD had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥433m would seem to be a step in the right direction.

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 Changzhou Qianhong BiopharmaLTD's Profit Performance

Changzhou Qianhong BiopharmaLTD's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Changzhou Qianhong BiopharmaLTD's earnings potential is at least as good as it seems, and maybe even better! On the other hand, its EPS actually shrunk in the last twelve months. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example - Changzhou Qianhong BiopharmaLTD has 1 warning sign we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Changzhou Qianhong BiopharmaLTD'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.