We Think Realtek Semiconductor's (TWSE:2379) Robust Earnings Are Conservative

The subdued stock price reaction suggests that Realtek Semiconductor Corp.'s (TWSE:2379) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

Check out our latest analysis for Realtek Semiconductor

Examining Cashflow Against Realtek Semiconductor's 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. 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 2024, Realtek Semiconductor had an accrual ratio of -1.24. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of NT$20b during the period, dwarfing its reported profit of NT$15.3b. Realtek Semiconductor shareholders are no doubt pleased that free cash flow improved over the last twelve months.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Realtek Semiconductor's Profit Performance

As we discussed above, Realtek Semiconductor's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Realtek Semiconductor's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 67% over the last twelve months. 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, we've discovered 1 warning sign that you should run your eye over to get a better picture of Realtek Semiconductor.

Today we've zoomed in on a single data point to better understand the nature of Realtek 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.