Here's Why Voltronic Power Technology's (TPE:6409) Statutory Earnings Are Arguably Too Conservative

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing Voltronic Power Technology (TPE:6409).

While Voltronic Power Technology was able to generate revenue of NT$13.4b in the last twelve months, we think its profit result of NT$2.26b was more important. One positive is that it has grown both its profit and its revenue, over the last few years.

See our latest analysis for Voltronic Power Technology

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. Today, we'll discuss Voltronic Power Technology's free cashflow relative to its earnings, and consider what that tells us about the company. 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.

Examining Cashflow Against Voltronic Power Technology's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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, Voltronic Power Technology had an accrual ratio of -0.57. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of NT$2.5b in the last year, which was a lot more than its statutory profit of NT$2.26b. Voltronic Power Technology's free cash flow improved over the last year, which is generally good to see.

Our Take On Voltronic Power Technology's Profit Performance

Happily for shareholders, Voltronic Power Technology produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Voltronic Power Technology's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 64% 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Voltronic Power Technology.

Today we've zoomed in on a single data point to better understand the nature of Voltronic Power Technology's profit. But there are plenty of other ways to inform your opinion of a company. 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. 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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