Hubei Biocause Heilen Pharmaceutical Co., Ltd.'s (SZSE:301211) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Examining Cashflow Against Hubei Biocause Heilen Pharmaceutical's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. The ratio shows us how much a company's profit exceeds its FCF.

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 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Hubei Biocause Heilen Pharmaceutical has an accrual ratio of 0.47 for the year to March 2024. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥61m despite its profit of CN¥173.6m, mentioned above. We saw that FCF was CN¥85m a year ago though, so Hubei Biocause Heilen Pharmaceutical 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 Hubei Biocause Heilen Pharmaceutical.

Our Take On Hubei Biocause Heilen Pharmaceutical's Profit Performance

As we have made quite clear, we're a bit worried that Hubei Biocause Heilen Pharmaceutical didn't back up the last year's profit with free cashflow. For this reason, we think that Hubei Biocause Heilen Pharmaceutical's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that, its earnings per share increased by 27% 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. So while earnings quality is important, it's equally important to consider the risks facing Hubei Biocause Heilen Pharmaceutical at this point in time. Case in point: We've spotted 2 warning signs for Hubei Biocause Heilen Pharmaceutical you should be mindful of and 1 of these bad boys is significant.

This note has only looked at a single factor that sheds light on the nature of Hubei Biocause Heilen Pharmaceutical'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.