There May Be Reason For Hope In All Cosmos Bio-Tech Holding's (TWSE:4148) Disappointing Earnings

Soft earnings didn't appear to concern All Cosmos Bio-Tech Holding Corporation's (TWSE:4148) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

Check out our latest analysis for All Cosmos Bio-Tech Holding

A Closer Look At All Cosmos Bio-Tech Holding'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.

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. 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.

All Cosmos Bio-Tech Holding has an accrual ratio of -0.31 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$796m in the last year, which was a lot more than its statutory profit of NT$139.4m. Given that All Cosmos Bio-Tech Holding had negative free cash flow in the prior corresponding period, the trailing twelve month resul of NT$796m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of All Cosmos Bio-Tech Holding.

Our Take On All Cosmos Bio-Tech Holding's Profit Performance

As we discussed above, All Cosmos Bio-Tech Holding's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think All Cosmos Bio-Tech Holding's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at 70% per year over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. You'd be interested to know, that we found 1 warning sign for All Cosmos Bio-Tech Holding and you'll want to know about this.

This note has only looked at a single factor that sheds light on the nature of All Cosmos Bio-Tech Holding'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. 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.