We Think That There Are Some Issues For Universe Pharmaceuticals (NASDAQ:UPC) Beyond Its Promising Earnings

Universe Pharmaceuticals INC's (NASDAQ:UPC) healthy profit numbers didn't contain any surprises for investors. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

See our latest analysis for Universe Pharmaceuticals

Zooming In On Universe Pharmaceuticals' 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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. The ratio shows us how much a company's profit exceeds its FCF.

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. 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 March 2021, Universe Pharmaceuticals had an accrual ratio of 0.85. 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 US$9.63m, a look at free cash flow indicates it actually burnt through US$1.3m in the last year. We saw that FCF was US$14m a year ago though, so Universe Pharmaceuticals has at least been able to generate positive FCF in the past. The good news for shareholders is that Universe Pharmaceuticals' accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Universe Pharmaceuticals.

Our Take On Universe Pharmaceuticals' Profit Performance

As we discussed above, we think Universe Pharmaceuticals' 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 Universe Pharmaceuticals' underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 12% EPS growth in the last year. 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. If you want to do dive deeper into Universe Pharmaceuticals, you'd also look into what risks it is currently facing. Be aware that Universe Pharmaceuticals is showing 3 warning signs in our investment analysis and 1 of those makes us a bit uncomfortable...

This note has only looked at a single factor that sheds light on the nature of Universe Pharmaceuticals' 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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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