We Think Da-Li DevelopmentLtd's (TWSE:6177) Profit Is Only A Baseline For What They Can Achieve

The subdued stock price reaction suggests that Da-Li Development Co.,Ltd.'s (TWSE:6177) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

View our latest analysis for Da-Li DevelopmentLtd

A Closer Look At Da-Li DevelopmentLtd'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). The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to September 2024, Da-Li DevelopmentLtd recorded an accrual ratio of -0.13. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of NT$5.6b in the last year, which was a lot more than its statutory profit of NT$1.93b. Given that Da-Li DevelopmentLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of NT$5.6b 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 Da-Li DevelopmentLtd's Profit Performance

Da-Li DevelopmentLtd's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Da-Li DevelopmentLtd's earnings potential is at least as good as it seems, and maybe even better! Better yet, its EPS are growing strongly, which is nice to see. 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. So while earnings quality is important, it's equally important to consider the risks facing Da-Li DevelopmentLtd at this point in time. You'd be interested to know, that we found 3 warning signs for Da-Li DevelopmentLtd and you'll want to know about these.

This note has only looked at a single factor that sheds light on the nature of Da-Li DevelopmentLtd'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 with significant insider holdings 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.