Shareholders Will Be Pleased With The Quality of Far Eastern Department Stores' (TWSE:2903) Earnings

Far Eastern Department Stores, Ltd. (TWSE:2903) recently posted some strong earnings, and the market responded positively. We did some digging and found some further encouraging factors that investors will like.

See our latest analysis for Far Eastern Department Stores

Zooming In On Far Eastern Department Stores' 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. 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 2023, Far Eastern Department Stores had an accrual ratio of -0.14. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. Indeed, in the last twelve months it reported free cash flow of NT$8.8b, well over the NT$2.75b it reported in profit. Far Eastern Department Stores did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Far Eastern Department Stores.

Our Take On Far Eastern Department Stores' Profit Performance

Far Eastern Department Stores' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Far Eastern Department Stores' statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 42% per year over the last three years. 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 want to do dive deeper into Far Eastern Department Stores, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 1 warning sign for Far Eastern Department Stores you should know about.

This note has only looked at a single factor that sheds light on the nature of Far Eastern Department Stores' 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.

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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.