The Strong Earnings Posted By Hong Ho Precision TextileLtd (TWSE:1446) Are A Good Indication Of The Strength Of The Business

Hong Ho Precision Textile Co.,Ltd. (TWSE:1446) just reported healthy earnings but the stock price didn't move much. Investors are probably missing some underlying factors which are encouraging for the future of the company.

View our latest analysis for Hong Ho Precision TextileLtd

Examining Cashflow Against Hong Ho Precision TextileLtd'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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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 September 2024, Hong Ho Precision TextileLtd had an accrual ratio of -0.69. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of NT$3.6b during the period, dwarfing its reported profit of NT$1.38b. Given that Hong Ho Precision TextileLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of NT$3.6b 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 Hong Ho Precision TextileLtd.

Our Take On Hong Ho Precision TextileLtd's Profit Performance

Happily for shareholders, Hong Ho Precision TextileLtd produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Hong Ho Precision TextileLtd'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. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. While conducting our analysis, we found that Hong Ho Precision TextileLtd has 1 warning sign and it would be unwise to ignore this.

Today we've zoomed in on a single data point to better understand the nature of Hong Ho Precision TextileLtd'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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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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.