The Strong Earnings Posted By Sunplus Innovation Technology (GTSM:5236) Are A Good Indication Of The Strength Of The Business

Sunplus Innovation Technology Inc.'s (GTSM:5236) strong earnings report was rewarded with a positive stock price move. We have done some analysis, and we found several positive factors beyond the profit numbers.

Check out our latest analysis for Sunplus Innovation Technology

A Closer Look At Sunplus Innovation 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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to December 2020, Sunplus Innovation Technology recorded an accrual ratio of -1.03. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of NT$482m in the last year, which was a lot more than its statutory profit of NT$467.7m. Sunplus Innovation Technology's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sunplus Innovation Technology.

Our Take On Sunplus Innovation Technology's Profit Performance

Happily for shareholders, Sunplus Innovation Technology produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Sunplus Innovation Technology'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 an extremely impressive rate over the last year. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example - Sunplus Innovation Technology has 2 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Sunplus Innovation Technology's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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. 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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