Is There More To The Story Than Dynapack International Technology's (GTSM:3211) Earnings Growth?

Broadly speaking, profitable businesses are less risky than unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we'll look at how useful this year's statutory profit is, when analysing Dynapack International Technology (GTSM:3211).

It's good to see that over the last twelve months Dynapack International Technology made a profit of NT$1.06b on revenue of NT$18.7b. In the chart below, you can see that its profit and revenue have both grown over the last three years.

Check out our latest analysis for Dynapack International Technology

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. Today, we'll discuss Dynapack International Technology's free cashflow relative to its earnings, and consider what that tells us about the company. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Dynapack International Technology.

Examining Cashflow Against Dynapack International Technology's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to September 2020, Dynapack International Technology recorded an accrual ratio of -0.12. 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$1.9b during the period, dwarfing its reported profit of NT$1.06b. Dynapack International Technology's free cash flow improved over the last year, which is generally good to see.

Our Take On Dynapack International Technology's Profit Performance

As we discussed above, Dynapack International Technology has perfectly satisfactory free cash flow relative to profit. Because of this, we think Dynapack International Technology'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. 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 Dynapack International Technology, you'd also look into what risks it is currently facing. For example - Dynapack International Technology has 2 warning signs we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Dynapack International Technology'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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