Despite posting some strong earnings, the market for HOB Biotech Group Corp.,Ltd's (SHSE:688656) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.
A Closer Look At HOB Biotech GroupLtd'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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
HOB Biotech GroupLtd has an accrual ratio of 0.21 for the year to March 2024. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Over the last year it actually had negative free cash flow of CN¥98m, in contrast to the aforementioned profit of CN¥45.6m. We also note that HOB Biotech GroupLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CN¥98m.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of HOB Biotech GroupLtd.
Our Take On HOB Biotech GroupLtd's Profit Performance
HOB Biotech GroupLtd's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Therefore, it seems possible to us that HOB Biotech GroupLtd's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 35% EPS growth 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Our analysis shows 3 warning signs for HOB Biotech GroupLtd (2 are a bit unpleasant!) and we strongly recommend you look at these before investing.
This note has only looked at a single factor that sheds light on the nature of HOB Biotech GroupLtd's profit. But there are plenty of other ways to inform your opinion of a company. 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. 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.