Why Weltrend Semiconductor's (TWSE:2436) Earnings Are Better Than They Seem

Despite posting healthy earnings, Weltrend Semiconductor, Inc.'s (TWSE:2436 ) stock has been quite weak. Our analysis suggests that there are some reasons for hope that investors should be aware of.

Check out our latest analysis for Weltrend Semiconductor

Zooming In On Weltrend 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. 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.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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 2024, Weltrend Semiconductor had an accrual ratio of -0.12. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of NT$581m during the period, dwarfing its reported profit of NT$211.3m. Weltrend Semiconductor shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Weltrend Semiconductor.

Our Take On Weltrend Semiconductor's Profit Performance

As we discussed above, Weltrend Semiconductor has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Weltrend Semiconductor's statutory profit actually understates its earnings potential! And the EPS is up 6.0% over the last twelve months. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Weltrend Semiconductor, you'd also look into what risks it is currently facing. Be aware that Weltrend Semiconductor is showing 3 warning signs in our investment analysis and 1 of those is concerning...

This note has only looked at a single factor that sheds light on the nature of Weltrend 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 with significant insider holdings to be useful.

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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.