If revenue represents a company's outward glow, then net profit serves as its internal health indicator. When the glow remains bright while health deteriorates, the underlying causes warrant close examination. Petti Co., a pet food manufacturer, recently released third-quarter results revealing this exact "revenue growth without profit growth" phenomenon. With nearly 300 million yuan in quarterly revenue but only 8 million yuan in net profit, what exactly happened?
The Dual Nature of Revenue Growth
Petti's financial report shows first-three-quarter revenue reached 699 million yuan, a 14.68% year-over-year increase. Third-quarter revenue grew even more dramatically at 38.52% to 299 million yuan. This growth undoubtedly reflects market recognition of Petti's products and the overall upward trend in China's pet food industry. However, this revenue surge stands in stark contrast to plummeting profits.
For the first three quarters, net profit totaled 31.11 million yuan, down 69.88% year-over-year. The third quarter saw just 8.18 million yuan in net profit, a 76.73% decline. This means while selling more products, the company's profitability significantly weakened. More concerning, combined first and second quarter profits were nearly triple the third quarter's results, suggesting a cliff-like drop in profitability during the most recent quarter.
The Domino Effect Behind Profit Decline
Petti attributed the profit decline to multiple factors in its earnings report, including rising raw material costs, increased domestic market expansion expenses, share-based compensation costs, and reduced government subsidies. These elements created a domino effect that successively compressed profit margins.
- Raw material inflation: As a primary cost component for pet food, rising material prices directly squeeze profits when product prices can't keep pace. Petti's increased raw material inventory suggests significant input cost inflation.
- Domestic market investment: With China's pet market booming and competition intensifying, companies must increase marketing and distribution spending to gain market share. While strategically necessary, these investments temporarily boost sales expenses and pressure profits.
- Share-based compensation: Petti's 25.97 million yuan in equity incentive costs, while motivating management and key employees, directly reduced current period profits through increased administrative expenses.
- Subsidy reduction: As a supplementary income source, decreased government grants also contributed to the profit decline, with current year subsidies substantially lower than 2022 levels.
Warning Signs in Financial Data
Beyond profit contraction, Petti's financial statements reveal additional red flags:
- Negative operating cash flow: The -162 million yuan operating cash flow for the first three quarters (down 552.34% year-over-year) indicates insufficient cash generation from core operations, potentially straining liquidity.
- Accounts receivable surge: A 68.6% increase in receivables versus year-start suggests slower collections and reduced capital efficiency. Prolonged collection issues risk creating bad debts that directly impact profits.
- Inventory and prepayment buildup: While partially reflecting raw material price hedging, significant increases in these items may signal overstocking risks. Future price declines or sales stagnation could generate losses.
- Expense inflation: Substantial rises in sales and administrative expenses directly drove the profit decline, requiring careful cost-benefit evaluation.
- Higher financing costs: Increased interest expenses suggest greater debt levels and financial leverage, elevating risk exposure.
Reassessing Growth Strategies
Petti's case serves as an industry wake-up call for pet food and broader consumer goods sectors. Revenue-focused growth without parallel profit improvement represents an unsustainable model. Companies must prioritize cost control, operational efficiency, and risk management to achieve quality growth. For Petti, balancing market expansion with profitability will prove critical to future success.