Weak Statutory Earnings May Not Tell The Whole Story For Cub Elecparts (TWSE:2231)

The market wasn't impressed with the soft earnings from Cub Elecparts Inc. (TWSE:2231) recently. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

Check out our latest analysis for Cub Elecparts

A Closer Look At Cub Elecparts' 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. 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.

Cub Elecparts has an accrual ratio of 0.24 for the year to December 2023. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of NT$443.8m, a look at free cash flow indicates it actually burnt through NT$1.2b in the last year. We saw that FCF was NT$761m a year ago though, so Cub Elecparts has at least been able to generate positive FCF in the past. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio. One positive for Cub Elecparts shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

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.

The Impact Of Unusual Items On Profit

Given the accrual ratio, it's not overly surprising that Cub Elecparts' profit was boosted by unusual items worth NT$50m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. If Cub Elecparts doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Cub Elecparts' Profit Performance

Summing up, Cub Elecparts received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue Cub Elecparts' profits probably give an overly generous impression of its sustainable level of profitability. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. When we did our research, we found 4 warning signs for Cub Elecparts (3 are potentially serious!) that we believe deserve your full attention.

Our examination of Cub Elecparts has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.