Advanced Wireless Semiconductor's (GTSM:8086) Earnings Are Growing But Is There More To The Story?

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. This article will consider whether Advanced Wireless Semiconductor's (GTSM:8086) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Advanced Wireless Semiconductor made a profit of NT$624.2m on revenue of NT$3.31b. We know some investors love those high revenue growth stocks, but we do like to look at profit, even if it is, perhaps, a bit old fashioned. In the chart below, you can see that its profit and revenue have both grown over the last three years.

See our latest analysis for Advanced Wireless Semiconductor

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. As a result, we'll today take a look at how dilution and cashflow shape our understanding of Advanced Wireless Semiconductor's earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Advanced Wireless Semiconductor.

Examining Cashflow Against Advanced Wireless Semiconductor's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2020, Advanced Wireless Semiconductor had an accrual ratio of 0.38. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of NT$297m despite its profit of NT$624.2m, mentioned above. We also note that Advanced Wireless Semiconductor's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of NT$297m. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Advanced Wireless Semiconductor expanded the number of shares on issue by 39% over the last year. That means its earnings are split among a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Advanced Wireless Semiconductor's EPS by clicking here.

How Is Dilution Impacting Advanced Wireless Semiconductor's Earnings Per Share? (EPS)

Advanced Wireless Semiconductor has improved its profit over the last three years, with an annualized gain of 158% in that time. But EPS was only up 137% per year, in the exact same period. And at a glance the 150% gain in profit over the last year impresses. But in comparison, EPS only increased by 132% over the same period. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Advanced Wireless Semiconductor shareholders will want to see that EPS figure continue to increase. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Advanced Wireless Semiconductor's Profit Performance

As it turns out, Advanced Wireless Semiconductor couldn't match its profit with cashflow and its dilution means that earnings per share growth is lagging net income growth. For the reasons mentioned above, we think that a perfunctory glance at Advanced Wireless Semiconductor's statutory profits might make it look better than it really is on an underlying level. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 4 warning signs for Advanced Wireless Semiconductor (of which 2 are a bit concerning!) you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. 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 decide to trade Advanced Wireless Semiconductor, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.