Some Investors May Be Willing To Look Past Sinco Pharmaceuticals Holdings' (HKG:6833) Soft Earnings

The market for Sinco Pharmaceuticals Holdings Limited's (HKG:6833) shares didn't move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

View our latest analysis for Sinco Pharmaceuticals Holdings

A Closer Look At Sinco Pharmaceuticals Holdings' 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to December 2023, Sinco Pharmaceuticals Holdings recorded an accrual ratio of -0.59. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of CN¥306m during the period, dwarfing its reported profit of CN¥42.4m. Sinco Pharmaceuticals Holdings shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sinco Pharmaceuticals Holdings.

Our Take On Sinco Pharmaceuticals Holdings' Profit Performance

Happily for shareholders, Sinco Pharmaceuticals Holdings produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Sinco Pharmaceuticals Holdings' statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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 Sinco Pharmaceuticals Holdings as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Sinco Pharmaceuticals Holdings has 2 warning signs and it would be unwise to ignore them.

Today we've zoomed in on a single data point to better understand the nature of Sinco Pharmaceuticals Holdings' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.