Some Investors May Be Willing To Look Past Fulin Plastic Industry (Cayman) Holding's (TWSE:1341) Soft Earnings

The market for Fulin Plastic Industry (Cayman) Holding Co., Ltd.'s (TWSE:1341) shares didn't move much after it posted weak earnings recently. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

View our latest analysis for Fulin Plastic Industry (Cayman) Holding

Zooming In On Fulin Plastic Industry (Cayman) Holding'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to December 2023, Fulin Plastic Industry (Cayman) Holding had an accrual ratio of -0.22. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of NT$563m in the last year, which was a lot more than its statutory profit of NT$230.2m. Fulin Plastic Industry (Cayman) Holding'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 Fulin Plastic Industry (Cayman) Holding.

Our Take On Fulin Plastic Industry (Cayman) Holding's Profit Performance

Happily for shareholders, Fulin Plastic Industry (Cayman) Holding produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Fulin Plastic Industry (Cayman) Holding's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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. So while earnings quality is important, it's equally important to consider the risks facing Fulin Plastic Industry (Cayman) Holding at this point in time. In terms of investment risks, we've identified 2 warning signs with Fulin Plastic Industry (Cayman) Holding, and understanding them should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Fulin Plastic Industry (Cayman) Holding'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.

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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.