Should You Rely On Galaxy Software Services's (GTSM:6752) Earnings Growth?

Broadly speaking, profitable businesses are less risky than 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 Galaxy Software Services' (GTSM:6752) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Galaxy Software Services made a profit of NT$115.2m on revenue of NT$1.05b. 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 Galaxy Software Services

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. As a result, we think it's well worth considering what Galaxy Software Services' cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. 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.

Zooming In On Galaxy Software Services' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. 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. 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, Galaxy Software Services had an accrual ratio of -0.62. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of NT$243m during the period, dwarfing its reported profit of NT$115.2m. Galaxy Software Services' free cash flow improved over the last year, which is generally good to see.

Our Take On Galaxy Software Services' Profit Performance

Happily for shareholders, Galaxy Software Services produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Galaxy Software Services' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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. For example, we've discovered 3 warning signs that you should run your eye over to get a better picture of Galaxy Software Services.

This note has only looked at a single factor that sheds light on the nature of Galaxy Software Services' 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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