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Modern Chinese Medicine Group (HKG:1643) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Simply Wall St ·  04/28 07:01

Modern Chinese Medicine Group Co., Ltd. (HKG:1643) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

View our latest analysis for Modern Chinese Medicine Group

SEHK:1643 Earnings and Revenue History April 27th 2022

Zooming In On Modern Chinese Medicine Group's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. 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. 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 December 2021, Modern Chinese Medicine Group had an accrual ratio of 0.83. 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 CN¥81.8m, a look at free cash flow indicates it actually burnt through CN¥13m in the last year. It's worth noting that Modern Chinese Medicine Group generated positive FCF of CN¥42m a year ago, so at least they've done it in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Modern Chinese Medicine Group.

Our Take On Modern Chinese Medicine Group's Profit Performance

As we discussed above, we think Modern Chinese Medicine Group's 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 Modern Chinese Medicine Group's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. 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 Modern Chinese Medicine Group as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Modern Chinese Medicine Group (including 1 which shouldn't be ignored).

This note has only looked at a single factor that sheds light on the nature of Modern Chinese Medicine Group'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

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