Stock Analysis

Investors Can Find Comfort In Macauto Industrial's (GTSM:9951) Earnings Quality

TPEX:9951
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Macauto Industrial Co., Ltd.'s (GTSM:9951) recent soft profit numbers didn't appear to worry shareholders. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

See our latest analysis for Macauto Industrial

earnings-and-revenue-history
GTSM:9951 Earnings and Revenue History March 31st 2021

Zooming In On Macauto Industrial'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Macauto Industrial has an accrual ratio of -0.15 for the year to December 2020. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of NT$880m, well over the NT$501.1m it reported in profit. Macauto Industrial shareholders are no doubt pleased that free cash flow improved over the last twelve months.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Macauto Industrial's Profit Performance

As we discussed above, Macauto Industrial has perfectly satisfactory free cash flow relative to profit. Because of this, we think Macauto Industrial's earnings potential is at least as good as it seems, and maybe even better! 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. If you want to do dive deeper into Macauto Industrial, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 1 warning sign with Macauto Industrial, and understanding it should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Macauto Industrial'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 that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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