Earnings Troubles May Signal Larger Issues for Beijing Tong Ren Tang Chinese Medicine (HKG:3613) Shareholders

Investors were disappointed by Beijing Tong Ren Tang Chinese Medicine Company Limited's (HKG:3613 ) latest earnings release. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

Check out our latest analysis for Beijing Tong Ren Tang Chinese Medicine

Examining Cashflow Against Beijing Tong Ren Tang Chinese Medicine'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. 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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Beijing Tong Ren Tang Chinese Medicine has an accrual ratio of 0.51 for the year to June 2024. 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 HK$384m, in contrast to the aforementioned profit of HK$494.1m. It's worth noting that Beijing Tong Ren Tang Chinese Medicine generated positive FCF of HK$665m a year ago, so at least they've done it 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 Beijing Tong Ren Tang Chinese Medicine's Profit Performance

As we have made quite clear, we're a bit worried that Beijing Tong Ren Tang Chinese Medicine didn't back up the last year's profit with free cashflow. 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. In further bad news, its earnings per share decreased in the last year. 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. If you'd like to know more about Beijing Tong Ren Tang Chinese Medicine as a business, it's important to be aware of any risks it's facing. For example, we've found that Beijing Tong Ren Tang Chinese Medicine has 2 warning signs (1 can't be ignored!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand 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. 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 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.