We Think Shareholders Should Be Aware Of Some Factors Beyond Jin Yang Pharmaceutical's (KOSDAQ:007370) Profit

Despite posting strong earnings, Jin Yang Pharmaceutical Co., Ltd.'s (KOSDAQ:007370) stock didn't move much over the last week. We decided to have a deeper look, and we believe that investors might be worried about several concerning factors that we found.

Our free stock report includes 3 warning signs investors should be aware of before investing in Jin Yang Pharmaceutical. Read for free now.

Zooming In On Jin Yang Pharmaceutical'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. 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to March 2025, Jin Yang Pharmaceutical recorded an accrual ratio of 0.73. 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. Even though it reported a profit of ₩30.1b, a look at free cash flow indicates it actually burnt through ₩76b in the last year. We saw that FCF was ₩5.2b a year ago though, so Jin Yang Pharmaceutical has at least been able to generate positive FCF in the past. However, that's not the end of the story. We can look at how unusual items in the profit and loss statement impacted its accrual ratio, as well as explore how dilution is impacting shareholders negatively.

View our latest analysis for Jin Yang Pharmaceutical

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jin Yang Pharmaceutical.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Jin Yang Pharmaceutical issued 9.1% more new shares over the last year. As a result, its net income is now split between a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. Check out Jin Yang Pharmaceutical's historical EPS growth by clicking on this link.

How Is Dilution Impacting Jin Yang Pharmaceutical's Earnings Per Share (EPS)?

Jin Yang Pharmaceutical has improved its profit over the last three years, with an annualized gain of 240% in that time. In comparison, earnings per share only gained 216% over the same period. And at a glance the 163% gain in profit over the last year impresses. But in comparison, EPS only increased by 135% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So Jin Yang Pharmaceutical shareholders will want to see that EPS figure continue to increase. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Jin Yang Pharmaceutical's profit was boosted by unusual items worth ₩24b in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. Jin Yang Pharmaceutical had a rather significant contribution from unusual items relative to its profit to March 2025. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Jin Yang Pharmaceutical's Profit Performance

Jin Yang Pharmaceutical didn't back up its earnings with free cashflow, but this isn't too surprising given profits were inflated by unusual items. Meanwhile, the new shares issued mean that shareholders now own less of the company, unless they tipped in more cash themselves. For all the reasons mentioned above, we think that, at a glance, Jin Yang Pharmaceutical's statutory profits could be considered to be low quality, because they are likely to give investors an overly positive impression of the company. If you'd like to know more about Jin Yang Pharmaceutical as a business, it's important to be aware of any risks it's facing. For example, Jin Yang Pharmaceutical has 3 warning signs (and 2 which are concerning) we think you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.