We Think World Known MFG (Cayman)'s (TPE:4581) Statutory Profit Might Understate Its Earnings Potential

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding World Known MFG (Cayman) (TPE:4581).

While World Known MFG (Cayman) was able to generate revenue of NT$863.4m in the last twelve months, we think its profit result of NT$74.3m was more important. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.

Check out our latest analysis for World Known MFG (Cayman)

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. So today we'll look at what World Known MFG (Cayman)'s cashflow tells us about the quality of its earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of World Known MFG (Cayman).

Zooming In On World Known MFG (Cayman)'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.

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 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. 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 2020, World Known MFG (Cayman) had an accrual ratio of -0.20. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of NT$187m during the period, dwarfing its reported profit of NT$74.3m. World Known MFG (Cayman)'s free cash flow improved over the last year, which is generally good to see.

Our Take On World Known MFG (Cayman)'s Profit Performance

Happily for shareholders, World Known MFG (Cayman) produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think World Known MFG (Cayman)'s underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! On the other hand, its EPS actually shrunk in the last twelve months. 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. If you'd like to know more about World Known MFG (Cayman) as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 3 warning signs for World Known MFG (Cayman) (of which 1 shouldn't be ignored!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of World Known MFG (Cayman)'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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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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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