There May Be Reason For Hope In Jilin Province Huinan Changlong Bio-pharmacy's (HKG:8049) Disappointing Earnings

Jilin Province Huinan Changlong Bio-pharmacy Company Limited's (HKG:8049) earnings announcement last week didn't impress shareholders. Despite the soft profit numbers, our analysis has optimistic about the overall quality of the income statement.

Check out our latest analysis for Jilin Province Huinan Changlong Bio-pharmacy

Zooming In On Jilin Province Huinan Changlong Bio-pharmacy'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. 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.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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.

Jilin Province Huinan Changlong Bio-pharmacy has an accrual ratio of -0.19 for the year to December 2023. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CN¥284m in the last year, which was a lot more than its statutory profit of CN¥148.2m. Jilin Province Huinan Changlong Bio-pharmacy 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 Jilin Province Huinan Changlong Bio-pharmacy.

Our Take On Jilin Province Huinan Changlong Bio-pharmacy's Profit Performance

As we discussed above, Jilin Province Huinan Changlong Bio-pharmacy's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Jilin Province Huinan Changlong Bio-pharmacy's statutory profit actually understates its earnings potential! And the EPS is up 17% annually, over the last three years. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. While conducting our analysis, we found that Jilin Province Huinan Changlong Bio-pharmacy has 1 warning sign and it would be unwise to ignore this.

Today we've zoomed in on a single data point to better understand the nature of Jilin Province Huinan Changlong Bio-pharmacy's 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.