Sichuan Biokin Pharmaceutical Co.,Ltd.'s (SHSE:688506) strong earnings report was rewarded with a positive stock price move. Our analysis found some more factors that we think are good for shareholders.

Examining Cashflow Against Sichuan Biokin PharmaceuticalLtd'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to March 2024, Sichuan Biokin PharmaceuticalLtd recorded an accrual ratio of -1.71. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of CN¥4.9b in the last year, which was a lot more than its statutory profit of CN¥4.39b. Notably, Sichuan Biokin PharmaceuticalLtd had negative free cash flow last year, so the CN¥4.9b it produced this year was a welcome improvement.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Sichuan Biokin PharmaceuticalLtd's Profit Performance

Happily for shareholders, Sichuan Biokin PharmaceuticalLtd produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Sichuan Biokin PharmaceuticalLtd's statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Every company has risks, and we've spotted 1 warning sign for Sichuan Biokin PharmaceuticalLtd you should know about.

Today we've zoomed in on a single data point to better understand the nature of Sichuan Biokin PharmaceuticalLtd's profit. 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 that insiders are buying.

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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.