L&K Engineering's (TWSE:6139) Earnings May Just Be The Starting Point

When companies post strong earnings, the stock generally performs well, just like L&K Engineering Co., Ltd.'s (TWSE:6139) stock has recently. We did some digging and found some further encouraging factors that investors will like.

See our latest analysis for L&K Engineering

A Closer Look At L&K Engineering's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. 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 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.

L&K Engineering has an accrual ratio of -1.22 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$5.6b during the period, dwarfing its reported profit of NT$2.89b. L&K Engineering's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of L&K Engineering.

Our Take On L&K Engineering's Profit Performance

Happily for shareholders, L&K Engineering produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think L&K Engineering's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, 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 L&K Engineering as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 2 warning signs for L&K Engineering and you'll want to know about these.

Today we've zoomed in on a single data point to better understand the nature of L&K Engineering's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.