Solid Earnings May Not Tell The Whole Story For Hangzhou Bio-Sincerity Pharma-TechLtd (SZSE:301096)

Hangzhou Bio-Sincerity Pharma-Tech Co.,Ltd.'s (SZSE:301096 ) stock didn't jump after it announced some healthy earnings. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

View our latest analysis for Hangzhou Bio-Sincerity Pharma-TechLtd

A Closer Look At Hangzhou Bio-Sincerity Pharma-TechLtd'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. 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.

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. 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 March 2024, Hangzhou Bio-Sincerity Pharma-TechLtd had an accrual ratio of 0.51. 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. Over the last year it actually had negative free cash flow of CN¥751m, in contrast to the aforementioned profit of CN¥286.7m. We also note that Hangzhou Bio-Sincerity Pharma-TechLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥751m.

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 Hangzhou Bio-Sincerity Pharma-TechLtd's Profit Performance

As we have made quite clear, we're a bit worried that Hangzhou Bio-Sincerity Pharma-TechLtd didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Hangzhou Bio-Sincerity Pharma-TechLtd's underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Be aware that Hangzhou Bio-Sincerity Pharma-TechLtd is showing 2 warning signs in our investment analysis and 1 of those is significant...

Today we've zoomed in on a single data point to better understand the nature of Hangzhou Bio-Sincerity Pharma-TechLtd'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. 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.