Tecnon Electronics' (SZSE:300650) Solid Earnings Have Been Accounted For Conservatively

Shareholders appeared to be happy with Tecnon Electronics Co., Ltd.'s (SZSE:300650) solid earnings report last week. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

View our latest analysis for Tecnon Electronics

Examining Cashflow Against Tecnon Electronics' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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 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.

For the year to March 2024, Tecnon Electronics had an accrual ratio of -0.27. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of CN¥447m, well over the CN¥45.1m it reported in profit. Tecnon Electronics' free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Tecnon Electronics.

Our Take On Tecnon Electronics' Profit Performance

As we discussed above, Tecnon Electronics' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Tecnon Electronics' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 42% over the last twelve months. 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. If you'd like to know more about Tecnon Electronics as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 2 warning signs with Tecnon Electronics, and understanding these should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Tecnon Electronics' 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.