Here's Why Sinopower Semiconductor's (GTSM:6435) Statutory Earnings Are Arguably Too Conservative

Statistically speaking, it is less risky to invest in profitable companies than in 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. This article will consider whether Sinopower Semiconductor's (GTSM:6435) statutory profits are a good guide to its underlying earnings.

While Sinopower Semiconductor was able to generate revenue of NT$2.45b in the last twelve months, we think its profit result of NT$201.1m was more important. In the chart below, you can see that its profit and revenue have both grown over the last three years, although its profit has slipped in the last twelve months.

Check out our latest analysis for Sinopower Semiconductor

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. As a result, we think it's well worth considering what Sinopower Semiconductor's cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sinopower Semiconductor.

Examining Cashflow Against Sinopower Semiconductor'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. 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. 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. 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 September 2020, Sinopower Semiconductor recorded an accrual ratio of -0.24. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of NT$380m, well over the NT$201.1m it reported in profit. Given that Sinopower Semiconductor had negative free cash flow in the prior corresponding period, the trailing twelve month resul of NT$380m would seem to be a step in the right direction.

Our Take On Sinopower Semiconductor's Profit Performance

Happily for shareholders, Sinopower Semiconductor produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Sinopower Semiconductor's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 28% per year 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Sinopower Semiconductor, and understanding it should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Sinopower Semiconductor's profit. But there are plenty of other ways to inform your opinion of a company. 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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