Stock Analysis

Are Jetwell Computer's (GTSM:3147) Statutory Earnings A Good Reflection Of Its Earnings Potential?

TPEX:3147
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Statistically speaking, it is less risky to invest in profitable companies than in 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 Jetwell Computer's (GTSM:3147) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Jetwell Computer made a profit of NT$82.6m on revenue of NT$2.44b. One positive is that it has grown both its profit and its revenue, over the last few years, though not in the last twelve months.

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earnings-and-revenue-history
GTSM:3147 Earnings and Revenue History November 22nd 2020

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. So today we'll look at what Jetwell Computer's cashflow tells us about the quality of its earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jetwell Computer.

A Closer Look At Jetwell Computer's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Jetwell Computer has an accrual ratio of -0.15 for the year to September 2020. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of NT$230m in the last year, which was a lot more than its statutory profit of NT$82.6m. Jetwell Computer's free cash flow improved over the last year, which is generally good to see.

Our Take On Jetwell Computer's Profit Performance

As we discussed above, Jetwell Computer has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Jetwell Computer's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Jetwell Computer as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 3 warning signs for Jetwell Computer and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Jetwell Computer'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 that insiders are buying.

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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.
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