There May Be Reason For Hope In Zeng Hsing Industrial's (TWSE:1558) Disappointing Earnings

Soft earnings didn't appear to concern Zeng Hsing Industrial Co., Ltd.'s (TWSE:1558) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for Zeng Hsing Industrial

Zooming In On Zeng Hsing Industrial's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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. 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.

Zeng Hsing Industrial has an accrual ratio of -0.25 for the year to December 2023. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of NT$2.1b in the last year, which was a lot more than its statutory profit of NT$253.3m. Zeng Hsing Industrial'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 Zeng Hsing Industrial.

Our Take On Zeng Hsing Industrial's Profit Performance

As we discussed above, Zeng Hsing Industrial's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Zeng Hsing Industrial's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! On the other hand, its EPS actually shrunk in the last twelve months. 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 Zeng Hsing Industrial as a business, it's important to be aware of any risks it's facing. For example, we've found that Zeng Hsing Industrial has 3 warning signs (1 shouldn't be ignored!) that deserve your attention before going any further with your analysis.

This note has only looked at a single factor that sheds light on the nature of Zeng Hsing Industrial'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 that insiders are buying 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.