TES Touch Embedded Solutions (Xiamen)'s (SZSE:003019) Soft Earnings Are Actually Better Than They Appear

The market was pleased with the recent earnings report from TES Touch Embedded Solutions (Xiamen) Co., Ltd. (SZSE:003019), despite the profit numbers being soft. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

Check out our latest analysis for TES Touch Embedded Solutions (Xiamen)

Zooming In On TES Touch Embedded Solutions (Xiamen)'s Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

TES Touch Embedded Solutions (Xiamen) has an accrual ratio of -0.13 for the year to March 2024. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of CN¥378m during the period, dwarfing its reported profit of CN¥209.8m. TES Touch Embedded Solutions (Xiamen) did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of TES Touch Embedded Solutions (Xiamen).

Our Take On TES Touch Embedded Solutions (Xiamen)'s Profit Performance

As we discussed above, TES Touch Embedded Solutions (Xiamen) has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that TES Touch Embedded Solutions (Xiamen)'s statutory profit actually understates its earnings potential! And the EPS is up 61% annually, over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. At Simply Wall St, we found 1 warning sign for TES Touch Embedded Solutions (Xiamen) and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of TES Touch Embedded Solutions (Xiamen)'s profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 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.