Should You Rely On Provision InformationLTD's (GTSM:6590) Earnings Growth?

As a general rule, we think profitable companies are less risky than companies that lose money. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing Provision InformationLTD (GTSM:6590).

It's good to see that over the last twelve months Provision InformationLTD made a profit of NT$73.2m on revenue of NT$432.1m. In the chart below, you can see that its profit and revenue have both grown over the last three years.

View our latest analysis for Provision InformationLTD

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. So today we'll look at what Provision InformationLTD'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 Provision InformationLTD.

Zooming In On Provision InformationLTD'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. The ratio shows us how much a company's profit exceeds its FCF.

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.

For the year to September 2020, Provision InformationLTD had an accrual ratio of -0.10. 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$99m during the period, dwarfing its reported profit of NT$73.2m. Provision InformationLTD shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On Provision InformationLTD's Profit Performance

As we discussed above, Provision InformationLTD has perfectly satisfactory free cash flow relative to profit. Because of this, we think Provision InformationLTD's earnings potential is at least as good as it seems, and maybe even better! Better yet, its EPS are growing strongly, which is nice to see. 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. So while earnings quality is important, it's equally important to consider the risks facing Provision InformationLTD at this point in time. At Simply Wall St, we found 2 warning signs for Provision InformationLTD and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Provision InformationLTD's profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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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