Here's Why Airmate (Cayman) International Co's (TPE:1626) Statutory Earnings Are Arguably Too Conservative

Broadly speaking, profitable businesses are less risky than unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. This article will consider whether Airmate (Cayman) International Co's (TPE:1626) statutory profits are a good guide to its underlying earnings.

While Airmate (Cayman) International Co was able to generate revenue of NT$9.25b in the last twelve months, we think its profit result of NT$104.4m was more important.

See our latest analysis for Airmate (Cayman) International Co

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. As a result, we think it's well worth considering what Airmate (Cayman) International Co's cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Airmate (Cayman) International Co.

Examining Cashflow Against Airmate (Cayman) International Co'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). 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. The ratio shows us how much a company's profit exceeds its FCF.

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 September 2020, Airmate (Cayman) International Co had an accrual ratio of -0.26. 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$908m, well over the NT$104.4m it reported in profit. Airmate (Cayman) International Co's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

Our Take On Airmate (Cayman) International Co's Profit Performance

As we discussed above, Airmate (Cayman) International Co's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Airmate (Cayman) International Co's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the 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 Airmate (Cayman) International Co at this point in time. Case in point: We've spotted 2 warning signs for Airmate (Cayman) International Co you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Airmate (Cayman) International Co'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. 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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