Zhejiang Tailin BioEngineeringLtd's (SZSE:300813) Sluggish Earnings Might Be Just The Beginning Of Its Problems

Zhejiang Tailin BioEngineering Co.,Ltd's (SZSE:300813) stock showed strength, with investors undeterred by its weak earnings report. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Zhejiang Tailin BioEngineeringLtd.

See our latest analysis for Zhejiang Tailin BioEngineeringLtd

Zooming In On Zhejiang Tailin BioEngineeringLtd'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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.

For the year to March 2024, Zhejiang Tailin BioEngineeringLtd had an accrual ratio of 0.48. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥160m despite its profit of CN¥7.97m, mentioned above. We saw that FCF was CN¥39m a year ago though, so Zhejiang Tailin BioEngineeringLtd has at least been able to generate positive FCF in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhejiang Tailin BioEngineeringLtd.

Our Take On Zhejiang Tailin BioEngineeringLtd's Profit Performance

As we have made quite clear, we're a bit worried that Zhejiang Tailin BioEngineeringLtd didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Zhejiang Tailin BioEngineeringLtd's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in 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. So while earnings quality is important, it's equally important to consider the risks facing Zhejiang Tailin BioEngineeringLtd at this point in time. To help with this, we've discovered 4 warning signs (1 is significant!) that you ought to be aware of before buying any shares in Zhejiang Tailin BioEngineeringLtd.

Today we've zoomed in on a single data point to better understand the nature of Zhejiang Tailin BioEngineeringLtd'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. 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.