Hold-Key Electric Wire & Cable's (TWSE:1618) Promising Earnings May Rest On Soft Foundations

Hold-Key Electric Wire & Cable Co., Ltd (TWSE:1618) just reported some strong earnings, and the market reacted accordingly with a healthy uplift in the share price. However, we think that shareholders may be missing some concerning details in the numbers.

See our latest analysis for Hold-Key Electric Wire & Cable

Examining Cashflow Against Hold-Key Electric Wire & Cable's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2024, Hold-Key Electric Wire & Cable had an accrual ratio of 0.24. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Over the last year it actually had negative free cash flow of NT$577m, in contrast to the aforementioned profit of NT$687.6m. It's worth noting that Hold-Key Electric Wire & Cable generated positive FCF of NT$306m 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 Hold-Key Electric Wire & Cable.

Our Take On Hold-Key Electric Wire & Cable's Profit Performance

Hold-Key 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. Therefore, it seems possible to us that Hold-Key Electric Wire & Cable's true underlying earnings power is actually less than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Hold-Key Electric Wire & Cable as a business, it's important to be aware of any risks it's facing. For example - Hold-Key Electric Wire & Cable has 1 warning sign we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Hold-Key Electric Wire & Cable's profit. 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. 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.