We Wouldn't Rely On Advanced Ceramic X's (GTSM:3152) Statutory Earnings As A Guide

As a general rule, we think profitable companies are less risky than companies that lose money. 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 Advanced Ceramic X's (GTSM:3152) statutory profits are a good guide to its underlying earnings.

We like the fact that Advanced Ceramic X made a profit of NT$737.1m on its revenue of NT$1.99b, in the last year. As you can see below, its profit has actually declined over the last three years, even though its revenue was flat.

View our latest analysis for Advanced Ceramic X

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. So today we'll look at what Advanced Ceramic X's cashflow tells us about the quality of its earnings. 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.

Examining Cashflow Against Advanced Ceramic X'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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Advanced Ceramic X has an accrual ratio of 0.49 for the year to September 2020. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of NT$737.1m, a look at free cash flow indicates it actually burnt through NT$78m in the last year. We saw that FCF was NT$505m a year ago though, so Advanced Ceramic X has at least been able to generate positive FCF in the past.

Our Take On Advanced Ceramic X's Profit Performance

As we have made quite clear, we're a bit worried that Advanced Ceramic X didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Advanced Ceramic X's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 6.0% EPS growth in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Advanced Ceramic X, you'd also look into what risks it is currently facing. For example, Advanced Ceramic X has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of Advanced Ceramic X'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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