Statutory Profit Doesn't Reflect How Good Visual Photonics Epitaxy's (TWSE:2455) Earnings Are

Investors were underwhelmed by the solid earnings posted by Visual Photonics Epitaxy Co., Ltd. (TWSE:2455) recently. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

See our latest analysis for Visual Photonics Epitaxy

Examining Cashflow Against Visual Photonics Epitaxy'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.

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

Visual Photonics Epitaxy has an accrual ratio of -0.13 for the year to September 2024. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of NT$1.1b during the period, dwarfing its reported profit of NT$726.6m. Visual Photonics Epitaxy's free cash flow improved over the last year, which is generally good to see.

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 Visual Photonics Epitaxy's Profit Performance

Visual Photonics Epitaxy's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Visual Photonics Epitaxy's earnings potential is at least as good as it seems, and maybe even better! Furthermore, it has done a great job growing EPS 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. In terms of investment risks, we've identified 1 warning sign with Visual Photonics Epitaxy, and understanding this should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Visual Photonics Epitaxy'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. 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.