The Strong Earnings Posted By Ruentex Engineering & Construction (TWSE:2597) Are A Good Indication Of The Strength Of The Business

Even though Ruentex Engineering & Construction Co., Ltd.'s (TWSE:2597) recent earnings release was robust, the market didn't seem to notice. Investors are probably missing some underlying factors which are encouraging for the future of the company.

Check out our latest analysis for Ruentex Engineering & Construction

Zooming In On Ruentex Engineering & Construction'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. 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.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Ruentex Engineering & Construction has an accrual ratio of -0.10 for the year to September 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of NT$3.6b, well over the NT$2.44b it reported in profit. Ruentex Engineering & Construction'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 Ruentex Engineering & Construction.

Our Take On Ruentex Engineering & Construction's Profit Performance

Ruentex Engineering & Construction's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Ruentex Engineering & Construction's statutory profit actually understates its earnings potential! And the EPS is up 38% annually, 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. If you want to do dive deeper into Ruentex Engineering & Construction, you'd also look into what risks it is currently facing. Case in point: We've spotted 1 warning sign for Ruentex Engineering & Construction you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Ruentex Engineering & Construction'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.