The market for Charmacy Pharmaceutical Co., Ltd.’s (HKG:2289) shares didn’t move much after it posted weak earnings recently. We did some digging, and we believe the earnings are stronger than they seem.
Zooming In On Charmacy Pharmaceutical’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). 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. You could think of the accrual ratio from cashflow as the ‘non-FCF profit ratio’.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.
Charmacy Pharmaceutical has an accrual ratio of -0.14 for the year to December 2025. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CN¥263m in the last year, which was a lot more than its statutory profit of CN¥46.3m. Charmacy Pharmaceutical’s free cash flow improved over the last year, which is generally good to see.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Charmacy Pharmaceutical.
Our Take On Charmacy Pharmaceutical’s Profit Performance
Charmacy Pharmaceutical’s accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Charmacy Pharmaceutical’s statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over 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. 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. Case in point: We’ve spotted 3 warning signs for Charmacy Pharmaceutical you should be mindful of and 1 of these bad boys can’t be ignored.
Today we’ve zoomed in on a single data point to better understand the nature of Charmacy Pharmaceutical’s profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.
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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.