We Think Elite Advanced Laser's (TWSE:3450) Solid Earnings Are Understated

Investors signalled that they were pleased with Elite Advanced Laser Corporation's (TWSE:3450) most recent earnings report. This reaction by the market reaction is understandable when looking at headline profits and we have found some further encouraging factors.

See our latest analysis for Elite Advanced Laser

Zooming In On Elite Advanced Laser'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). 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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

Elite Advanced Laser has an accrual ratio of -0.11 for the year to June 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of NT$522m in the last year, which was a lot more than its statutory profit of NT$90.6m. Elite Advanced Laser did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Elite Advanced Laser.

Our Take On Elite Advanced Laser's Profit Performance

As we discussed above, Elite Advanced Laser has perfectly satisfactory free cash flow relative to profit. Because of this, we think Elite Advanced Laser's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at an extremely impressive rate 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. 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. In terms of investment risks, we've identified 2 warning signs with Elite Advanced Laser, and understanding these bad boys should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Elite Advanced Laser'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.