Some May Be Optimistic About Qing Song HealthLtd's (TWSE:6931) Earnings

Soft earnings didn't appear to concern Qing Song Health Co.,Ltd.'s (TWSE:6931) shareholders over the last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

Zooming In On Qing Song HealthLtd'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. 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. 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".

For the year to December 2024, Qing Song HealthLtd had an accrual ratio of -0.31. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of NT$209m, well over the NT$40.6m it reported in profit. Given that Qing Song HealthLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of NT$209m would seem to be a step in the right direction. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Qing Song HealthLtd.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Qing Song HealthLtd expanded the number of shares on issue by 10% 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. You can see a chart of Qing Song HealthLtd's EPS by clicking here.

How Is Dilution Impacting Qing Song HealthLtd's Earnings Per Share (EPS)?

Qing Song HealthLtd was losing money three years ago. And even focusing only on the last twelve months, we see profit is down 32%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 31% in the same period. So you can see that the dilution has had a bit of an impact on shareholders.

If Qing Song HealthLtd's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

Our Take On Qing Song HealthLtd's Profit Performance

In conclusion, Qing Song HealthLtd has a strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share are dropping faster than its profit. Considering all the aforementioned, we'd venture that Qing Song HealthLtd's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Qing Song HealthLtd.

Our examination of Qing Song HealthLtd has focussed on certain factors that can make its earnings look better than they are. 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 with significant insider holdings 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.