Are Eagle Cold Storage Enterprise's (GTSM:8905) Statutory Earnings A Good Reflection Of Its Earnings Potential?

Broadly speaking, profitable businesses are less risky than unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Eagle Cold Storage Enterprise's (GTSM:8905) statutory profits are a good guide to its underlying earnings.

While Eagle Cold Storage Enterprise was able to generate revenue of NT$2.20b in the last twelve months, we think its profit result of NT$29.6m was more important. The chart below shows that both revenue and profit have declined over the last three years.

View our latest analysis for Eagle Cold Storage Enterprise

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. As a result, we think it's well worth considering what Eagle Cold Storage Enterprise's cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Eagle Cold Storage Enterprise.

A Closer Look At Eagle Cold Storage Enterprise'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. 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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2020, Eagle Cold Storage Enterprise had an accrual ratio of -0.14. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of NT$550m during the period, dwarfing its reported profit of NT$29.6m. Given that Eagle Cold Storage Enterprise had negative free cash flow in the prior corresponding period, the trailing twelve month resul of NT$550m would seem to be a step in the right direction.

Our Take On Eagle Cold Storage Enterprise's Profit Performance

As we discussed above, Eagle Cold Storage Enterprise has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Eagle Cold Storage Enterprise'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 Eagle Cold Storage Enterprise at this point in time. Our analysis shows 4 warning signs for Eagle Cold Storage Enterprise (1 is concerning!) and we strongly recommend you look at them before investing.

This note has only looked at a single factor that sheds light on the nature of Eagle Cold Storage Enterprise'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. 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.
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