Weak Statutory Earnings May Not Tell The Whole Story For Guangdong Taienkang Pharmaceutical (SZSE:301263)

The subdued market reaction suggests that Guangdong Taienkang Pharmaceutical Co., Ltd.'s (SZSE:301263) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

See our latest analysis for Guangdong Taienkang Pharmaceutical

Examining Cashflow Against Guangdong Taienkang 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Guangdong Taienkang Pharmaceutical has an accrual ratio of 0.23 for the year to June 2024. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of CN¥136.9m, a look at free cash flow indicates it actually burnt through CN¥153m in the last year. We saw that FCF was CN¥46m a year ago though, so Guangdong Taienkang Pharmaceutical has at least been able to generate positive FCF in the past.

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 Guangdong Taienkang Pharmaceutical's Profit Performance

Guangdong Taienkang Pharmaceutical didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Guangdong Taienkang Pharmaceutical's true underlying earnings power is actually less 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. If you'd like to know more about Guangdong Taienkang Pharmaceutical as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Guangdong Taienkang Pharmaceutical has 2 warning signs and it would be unwise to ignore them.

This note has only looked at a single factor that sheds light on the nature of Guangdong Taienkang Pharmaceutical'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 with high insider ownership.

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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.