Does Apex Medical's (TPE:4106) Statutory Profit Adequately Reflect Its Underlying Profit?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Apex Medical's (TPE:4106) statutory profits are a good guide to its underlying earnings.

We like the fact that Apex Medical made a profit of NT$110.0m on its revenue of NT$1.97b, in the last year. The chart below shows that both revenue and profit have declined over the last three years.

Check out our latest analysis for Apex Medical

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. Today, we'll discuss Apex Medical's free cashflow relative to its earnings, and consider what that tells us about the company. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Apex Medical.

A Closer Look At Apex Medical's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Apex Medical has an accrual ratio of -0.10 for the year to September 2020. 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$293m, well over the NT$110.0m it reported in profit. Given that Apex Medical had negative free cash flow in the prior corresponding period, the trailing twelve month resul of NT$293m would seem to be a step in the right direction.

Our Take On Apex Medical's Profit Performance

As we discussed above, Apex Medical has perfectly satisfactory free cash flow relative to profit. Because of this, we think Apex Medical's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 5.5% over the last twelve months. 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. If you want to do dive deeper into Apex Medical, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 1 warning sign with Apex Medical, and understanding it should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Apex Medical'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. 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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