Ta Chen Stainless Pipe's (TWSE:2027) Conservative Accounting Might Explain Soft Earnings

The market for Ta Chen Stainless Pipe Co., Ltd.'s (TWSE:2027) shares didn't move much after it posted weak earnings recently. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

See our latest analysis for Ta Chen Stainless Pipe

Examining Cashflow Against Ta Chen Stainless Pipe'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). 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. 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 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. 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 December 2023, Ta Chen Stainless Pipe had an accrual ratio of -0.12. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of NT$18b in the last year, which was a lot more than its statutory profit of NT$5.33b. Given that Ta Chen Stainless Pipe had negative free cash flow in the prior corresponding period, the trailing twelve month resul of NT$18b would seem to be a step in the right direction.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Ta Chen Stainless Pipe's Profit Performance

As we discussed above, Ta Chen Stainless Pipe has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Ta Chen Stainless Pipe's statutory profit actually understates its earnings potential! 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 Ta Chen Stainless Pipe as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 2 warning signs for Ta Chen Stainless Pipe you should know about.

This note has only looked at a single factor that sheds light on the nature of Ta Chen Stainless Pipe'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 that insiders are buying to be useful.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.