Solid Earnings Reflect Rexon IndustrialLtd's (TWSE:1515) Strength As A Business

Even though Rexon Industrial Corp.,Ltd's (TWSE:1515) recent earnings release was robust, the market didn't seem to notice. We think that investors have missed some encouraging factors underlying the profit figures.

View our latest analysis for Rexon IndustrialLtd

A Closer Look At Rexon IndustrialLtd'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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

Over the twelve months to December 2023, Rexon IndustrialLtd recorded an accrual ratio of -0.60. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of NT$1.9b during the period, dwarfing its reported profit of NT$308.8m. Notably, Rexon IndustrialLtd had negative free cash flow last year, so the NT$1.9b it produced this year was a welcome improvement.

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 Rexon IndustrialLtd's Profit Performance

Happily for shareholders, Rexon IndustrialLtd produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Rexon IndustrialLtd's statutory profit actually understates its earnings potential! And it's also positive that the company showed enough improvement to book a profit this year, after losing money last year. 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 want to do dive deeper into Rexon IndustrialLtd, you'd also look into what risks it is currently facing. Case in point: We've spotted 2 warning signs for Rexon IndustrialLtd you should be mindful of and 1 of them is potentially serious.

This note has only looked at a single factor that sheds light on the nature of Rexon IndustrialLtd'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. 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.