Chien Shing Stainless Steel's (TWSE:2025) Problems Go Beyond Weak Profit

Investors were disappointed by Chien Shing Stainless Steel Co., Ltd.'s (TWSE:2025 ) latest earnings release. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.

See our latest analysis for Chien Shing Stainless Steel

A Closer Look At Chien Shing Stainless Steel'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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".

Chien Shing Stainless Steel has an accrual ratio of 0.89 for the year to December 2023. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of NT$704m, in contrast to the aforementioned profit of NT$228.2m. We saw that FCF was NT$160m a year ago though, so Chien Shing Stainless Steel has at least been able to generate positive FCF in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Chien Shing Stainless Steel.

Our Take On Chien Shing Stainless Steel's Profit Performance

As we have made quite clear, we're a bit worried that Chien Shing Stainless Steel didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Chien Shing Stainless Steel's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 4 warning signs for Chien Shing Stainless Steel you should be mindful of and 2 of these are a bit unpleasant.

Today we've zoomed in on a single data point to better understand the nature of Chien Shing Stainless Steel'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 that insiders are buying.

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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.