We Think Acelon Chemicals & Fiber's (TPE:1466) Healthy Earnings Might Be Conservative

The market seemed underwhelmed by last week's earnings announcement from Acelon Chemicals & Fiber Corporation (TPE:1466) despite the healthy numbers. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

See our latest analysis for Acelon Chemicals & Fiber

Zooming In On Acelon Chemicals & Fiber'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to December 2020, Acelon Chemicals & Fiber had an accrual ratio of -0.16. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of NT$454m, well over the NT$42.5m it reported in profit. Given that Acelon Chemicals & Fiber had negative free cash flow in the prior corresponding period, the trailing twelve month resul of NT$454m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Acelon Chemicals & Fiber.

Our Take On Acelon Chemicals & Fiber's Profit Performance

Acelon Chemicals & Fiber's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Acelon Chemicals & Fiber's statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. 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. So while earnings quality is important, it's equally important to consider the risks facing Acelon Chemicals & Fiber at this point in time. Our analysis shows 3 warning signs for Acelon Chemicals & Fiber (1 is potentially serious!) and we strongly recommend you look at these before investing.

This note has only looked at a single factor that sheds light on the nature of Acelon Chemicals & Fiber'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. 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.
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