Broadly speaking, profitable businesses are less risky than unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it’s not always clear whether statutory profits are a good guide, going forward. In this article, we’ll look at how useful this year’s statutory profit is, when analysing eGalax_eMPIA Technology (GTSM:3556).
It’s good to see that over the last twelve months eGalax_eMPIA Technology made a profit of NT$218.8m on revenue of NT$1.12b. As depicted below, while its revenue may have fallen over the last few years, its profit actually improved.
Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. So today we’ll look at what eGalax_eMPIA Technology’s cashflow tells us about the quality of its earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of eGalax_eMPIA Technology.
A Closer Look At eGalax_eMPIA Technology’s Earnings
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company’s free cash flow (FCF) matches its profit. 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. The ratio shows us how much a company’s profit exceeds its FCF.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it’s worth noting where the accrual ratio is rather high. 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 September 2019, eGalax_eMPIA Technology had an accrual ratio of -0.15. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of NT$279m during the period, dwarfing its reported profit of NT$218.8m. eGalax_eMPIA Technology’s year-on-year free cash flow was as flat as two-day-old fizzy drink.
Our Take On eGalax_eMPIA Technology’s Profit Performance
As we discussed above, eGalax_eMPIA Technology has perfectly satisfactory free cash flow relative to profit. Because of this, we think eGalax_eMPIA Technology’s earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 6.3% annually, 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. While it’s very important to consider the profit and loss statement, you can also learn a lot about a company by looking at its balance sheet. You can seeour latest analysis on eGalax_eMPIA Technology’s balance sheet health here.
This note has only looked at a single factor that sheds light on the nature of eGalax_eMPIA Technology’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. 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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.