Gansu Longshenrongfa Pharmaceutical IndustryLTD's (SZSE:300534) Soft Earnings Are Actually Better Than They Appear

The most recent earnings report from Gansu Longshenrongfa Pharmaceutical Industry CO.,LTD (SZSE:300534) was disappointing for shareholders. Despite the soft profit numbers, our analysis has optimistic about the overall quality of the income statement.

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Zooming In On Gansu Longshenrongfa Pharmaceutical IndustryLTD's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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 2024, Gansu Longshenrongfa Pharmaceutical IndustryLTD had an accrual ratio of -0.12. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥92m, well over the CN¥25.8m it reported in profit. Given that Gansu Longshenrongfa Pharmaceutical IndustryLTD had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥92m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Gansu Longshenrongfa Pharmaceutical IndustryLTD.

Our Take On Gansu Longshenrongfa Pharmaceutical IndustryLTD's Profit Performance

Gansu Longshenrongfa Pharmaceutical IndustryLTD's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Gansu Longshenrongfa Pharmaceutical IndustryLTD's earnings potential is at least as good as it seems, and maybe even better! Unfortunately, though, its earnings per share actually fell back over the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. 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. You'd be interested to know, that we found 1 warning sign for Gansu Longshenrongfa Pharmaceutical IndustryLTD and you'll want to know about it.

This note has only looked at a single factor that sheds light on the nature of Gansu Longshenrongfa Pharmaceutical IndustryLTD's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.