We Like Tainan Enterprise (Cayman)'s (TPE:5906) Earnings For More Than Just Statutory Profit

Tainan Enterprise (Cayman) Co., Limited's (TPE:5906) solid earnings announcement recently didn't do much to the stock price. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.

View our latest analysis for Tainan Enterprise (Cayman)

Zooming In On Tainan Enterprise (Cayman)'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. 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. 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Tainan Enterprise (Cayman) has an accrual ratio of -0.29 for the year to December 2020. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of NT$229m during the period, dwarfing its reported profit of NT$70.6m. Tainan Enterprise (Cayman)'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 Tainan Enterprise (Cayman).

Our Take On Tainan Enterprise (Cayman)'s Profit Performance

As we discussed above, Tainan Enterprise (Cayman)'s accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Tainan Enterprise (Cayman)'s underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. While conducting our analysis, we found that Tainan Enterprise (Cayman) has 2 warning signs and it would be unwise to ignore these.

This note has only looked at a single factor that sheds light on the nature of Tainan Enterprise (Cayman)'s profit. But there are plenty of other ways to inform your opinion of a company. 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.

When trading Tainan Enterprise (Cayman) or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.