Beijing Tong Ren Tang Chinese Medicine's (HKG:3613) Sluggish Earnings Might Be Just The Beginning Of Its Problems

The subdued market reaction suggests that Beijing Tong Ren Tang Chinese Medicine Company Limited's (HKG:3613) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.

View our latest analysis for Beijing Tong Ren Tang Chinese Medicine

A Closer Look At Beijing Tong Ren Tang Chinese Medicine'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. 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. 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. 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 2020, Beijing Tong Ren Tang Chinese Medicine had an accrual ratio of 0.43. Ergo, its free cash flow is significantly weaker than its profit. Statistically speaking, that's a real negative for future earnings. Indeed, in the last twelve months it reported free cash flow of HK$103m, which is significantly less than its profit of HK$542.5m. Beijing Tong Ren Tang Chinese Medicine's free cash flow actually declined over the last year, but it may bounce back next year, since free cash flow is often more volatile than accounting profits.

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 Beijing Tong Ren Tang Chinese Medicine's Profit Performance

As we discussed above, we think Beijing Tong Ren Tang Chinese Medicine's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Beijing Tong Ren Tang Chinese Medicine's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 11% per annum growth in EPS for the last three. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. 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. Case in point: We've spotted 3 warning signs for Beijing Tong Ren Tang Chinese Medicine you should be mindful of and 1 of these shouldn't be ignored.

This note has only looked at a single factor that sheds light on the nature of Beijing Tong Ren Tang Chinese Medicine'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. 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.
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