Zhejiang Tailin BioEngineering Co.,Ltd's (SZSE:300813) stock showed strength, with investors undeterred by its weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

Examining Cashflow Against Zhejiang Tailin BioEngineeringLtd'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.

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.

Over the twelve months to March 2024, Zhejiang Tailin BioEngineeringLtd recorded an accrual ratio of 0.48. Statistically speaking, that's a real negative for future earnings. 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 CN¥160m, in contrast to the aforementioned profit of CN¥7.97m. We saw that FCF was CN¥39m a year ago though, so Zhejiang Tailin BioEngineeringLtd has at least been able to generate positive FCF in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhejiang Tailin BioEngineeringLtd.

Our Take On Zhejiang Tailin BioEngineeringLtd's Profit Performance

As we have made quite clear, we're a bit worried that Zhejiang Tailin BioEngineeringLtd didn't back up the last year's profit with free cashflow. For this reason, we think that Zhejiang Tailin BioEngineeringLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Sadly, its EPS was down over the last twelve months. 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 Zhejiang Tailin BioEngineeringLtd as a business, it's important to be aware of any risks it's facing. For instance, we've identified 4 warning signs for Zhejiang Tailin BioEngineeringLtd (1 is significant) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Zhejiang Tailin BioEngineeringLtd's 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. 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.