Impressive Earnings May Not Tell The Whole Story For Dah San Electric Wire & Cable (TWSE:1615)

Unsurprisingly, Dah San Electric Wire & Cable Corp.'s (TWSE:1615) stock price was strong on the back of its healthy earnings report. However, we think that shareholders may be missing some concerning details in the numbers.

Check out our latest analysis for Dah San Electric Wire & Cable

Examining Cashflow Against Dah San Electric Wire & Cable'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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to March 2024, Dah San Electric Wire & Cable had an accrual ratio of 0.21. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. In the last twelve months it actually had negative free cash flow, with an outflow of NT$100m despite its profit of NT$587.9m, mentioned above. It's worth noting that Dah San Electric Wire & Cable generated positive FCF of NT$118m a year ago, so at least they've done it in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Dah San Electric Wire & Cable.

Our Take On Dah San Electric Wire & Cable's Profit Performance

Dah San Electric Wire & Cable didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Dah San Electric Wire & Cable's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 66% per annum growth in EPS for the last three. 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 Dah San Electric Wire & Cable, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for Dah San Electric Wire & Cable (of which 1 is potentially serious!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Dah San Electric Wire & Cable's profit. But there are plenty of other ways to inform your opinion of a company. 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 with high insider ownership.

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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.