Makalot Industrial's (TWSE:1477) Solid Earnings Have Been Accounted For Conservatively

Despite posting healthy earnings, Makalot Industrial Co., Ltd.'s (TWSE:1477 ) stock has been quite weak. Our analysis suggests that there are some reasons for hope that investors should be aware of.

View our latest analysis for Makalot Industrial

Zooming In On Makalot Industrial'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. 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'.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to September 2024, Makalot Industrial recorded an accrual ratio of -0.12. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of NT$5.3b, well over the NT$4.06b it reported in profit. Makalot Industrial's free cash flow improved over the last year, which is generally good to see.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Makalot Industrial's Profit Performance

Makalot Industrial's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Makalot Industrial's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 58% annually, over the last three years. 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 Makalot Industrial at this point in time. At Simply Wall St, we found 1 warning sign for Makalot Industrial and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Makalot Industrial'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 with high insider ownership.

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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.