CHANG TYPE Industrial's (TWSE:1541) Strong Earnings Are Of Good Quality

When companies post strong earnings, the stock generally performs well, just like CHANG TYPE Industrial Co., Ltd.'s (TWSE:1541) stock has recently. Our analysis found some more factors that we think are good for shareholders.

Check out our latest analysis for CHANG TYPE Industrial

Examining Cashflow Against CHANG TYPE Industrial's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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 June 2024, CHANG TYPE Industrial had an accrual ratio of -0.23. 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$697m in the last year, which was a lot more than its statutory profit of NT$202.5m. CHANG TYPE Industrial's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of CHANG TYPE Industrial.

Our Take On CHANG TYPE Industrial's Profit Performance

As we discussed above, CHANG TYPE Industrial'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 CHANG TYPE Industrial's statutory profit actually understates its earnings potential! 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. If you'd like to know more about CHANG TYPE Industrial as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for CHANG TYPE Industrial you should be mindful of and 1 of these is a bit concerning.

Today we've zoomed in on a single data point to better understand the nature of CHANG TYPE Industrial'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. 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.