Here's Why C Sun Mfg's (TPE:2467) Statutory Earnings Are Arguably Too Conservative

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether C Sun Mfg's (TPE:2467) statutory profits are a good guide to its underlying earnings.

We like the fact that C Sun Mfg made a profit of NT$343.5m on its revenue of NT$3.81b, in the last year. The chart below shows that both revenue and profit have declined over the last three years.

Check out our latest analysis for C Sun Mfg

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. Today, we'll discuss C Sun Mfg's free cashflow relative to its earnings, and consider what that tells us about the company. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of C Sun Mfg.

Examining Cashflow Against C Sun Mfg'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. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2020, C Sun Mfg had an accrual ratio of -0.37. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of NT$1.4b in the last year, which was a lot more than its statutory profit of NT$343.5m. C Sun Mfg's free cash flow improved over the last year, which is generally good to see.

Our Take On C Sun Mfg's Profit Performance

Happily for shareholders, C Sun Mfg produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think C Sun Mfg'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. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. You'd be interested to know, that we found 3 warning signs for C Sun Mfg and you'll want to know about these.

Today we've zoomed in on a single data point to better understand the nature of C Sun Mfg'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. 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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