C Sun Mfg's (TWSE:2467) Conservative Accounting Might Explain Soft Earnings

The market for C Sun Mfg Ltd.'s (TWSE:2467) shares didn't move much after it posted weak earnings recently. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

View our latest analysis for C Sun Mfg

Zooming In On C Sun Mfg'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. 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. 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. 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.

C Sun Mfg has an accrual ratio of -0.14 for the year to December 2023. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of NT$959m during the period, dwarfing its reported profit of NT$486.3m. C Sun Mfg's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of C Sun Mfg.

Our Take On C Sun Mfg's Profit Performance

C Sun Mfg's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think C Sun Mfg's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 12% annually, 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 C Sun Mfg as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for C Sun Mfg you should be mindful of and 1 of them is significant.

This note has only looked at a single factor that sheds light on 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. 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 that insiders are buying.

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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.