Cashbox Partyworld's (GTSM:8359) Soft Earnings Are Actually Better Than They Appear

Soft earnings didn't appear to concern Cashbox Partyworld Co., Ltd.'s (GTSM:8359) shareholders over the last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

Check out our latest analysis for Cashbox Partyworld

Zooming In On Cashbox Partyworld'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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to December 2020, Cashbox Partyworld had an accrual ratio of -0.15. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of NT$1.4b in the last year, which was a lot more than its statutory profit of NT$797.0m. Cashbox Partyworld shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Cashbox Partyworld.

Our Take On Cashbox Partyworld's Profit Performance

As we discussed above, Cashbox Partyworld has perfectly satisfactory free cash flow relative to profit. Because of this, we think Cashbox Partyworld's earnings potential is at least as good as it seems, and maybe even better! 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 Cashbox Partyworld as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 1 warning sign for Cashbox Partyworld you should know about.

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