We Think Tecnon Electronics' (SZSE:300650) Robust Earnings Are Conservative

Investors were underwhelmed by the solid earnings posted by Tecnon Electronics Co., Ltd. (SZSE:300650) recently. We did some digging and actually think they are being unnecessarily pessimistic.

See our latest analysis for Tecnon Electronics

Zooming In On Tecnon Electronics' 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. The ratio shows us how much a company's profit exceeds its FCF.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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.

For the year to September 2024, Tecnon Electronics had an accrual ratio of -0.33. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of CN¥535m in the last year, which was a lot more than its statutory profit of CN¥50.3m. Tecnon Electronics' 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 Tecnon Electronics.

Our Take On Tecnon Electronics' Profit Performance

Happily for shareholders, Tecnon Electronics produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Tecnon Electronics' statutory profit actually understates its earnings potential! And the EPS is up 70% over the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. You'd be interested to know, that we found 1 warning sign for Tecnon Electronics and you'll want to know about this.

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. 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. 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.