Cheng Shin Rubber Ind's (TWSE:2105) Solid Earnings Have Been Accounted For Conservatively

Investors signalled that they were pleased with Cheng Shin Rubber Ind. Co., Ltd.'s (TWSE:2105) most recent earnings report. This reaction by the market reaction is understandable when looking at headline profits and we have found some further encouraging factors.

See our latest analysis for Cheng Shin Rubber Ind

A Closer Look At Cheng Shin Rubber Ind's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 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.

Over the twelve months to December 2023, Cheng Shin Rubber Ind recorded an accrual ratio of -0.11. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of NT$18b during the period, dwarfing its reported profit of NT$7.18b. Cheng Shin Rubber Ind 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 Cheng Shin Rubber Ind's Profit Performance

Cheng Shin Rubber Ind's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Cheng Shin Rubber Ind's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 20% per year over the last three years. 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 Cheng Shin Rubber Ind as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 1 warning sign for Cheng Shin Rubber Ind and you'll want to know about it.

Today we've zoomed in on a single data point to better understand the nature of Cheng Shin Rubber Ind'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. 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.