Despite posting healthy earnings, Jiangsu Hengrui Medicine Co., Ltd.'s (SHSE:600276 ) stock has been quite weak. We have done some analysis, and found some encouraging factors that we believe the shareholders should consider.
Zooming In On Jiangsu Hengrui Medicine'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). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.
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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Jiangsu Hengrui Medicine has an accrual ratio of -0.12 for the year to March 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥7.0b, well over the CN¥4.43b it reported in profit. Given that Jiangsu Hengrui Medicine had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CN¥7.0b would seem to be a step in the right direction.
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 Jiangsu Hengrui Medicine's Profit Performance
As we discussed above, Jiangsu Hengrui Medicine has perfectly satisfactory free cash flow relative to profit. Because of this, we think Jiangsu Hengrui Medicine's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share increased by 15% 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. While it's really important to consider how well a company's statutory earnings represent its true earnings power, it's also worth taking a look at what analysts are forecasting for the future. Luckily, you can check out what analysts are forecasting by clicking here.
This note has only looked at a single factor that sheds light on the nature of Jiangsu Hengrui Medicine'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.