Statistically speaking, it is less risky to invest in profitable companies than in 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. This article will consider whether AMPAK Technology's (GTSM:6546) statutory profits are a good guide to its underlying earnings.
While AMPAK Technology was able to generate revenue of NT$2.35b in the last twelve months, we think its profit result of NT$166.9m was more important. Even though its revenue is down over the last three years, its profit has actually increased, as you can see, below.
Check out our latest analysis for AMPAK Technology
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 AMPAK Technology's cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of AMPAK Technology.
A Closer Look At AMPAK Technology'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). 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
AMPAK Technology has an accrual ratio of -0.56 for the year to June 2020. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of NT$380m in the last year, which was a lot more than its statutory profit of NT$166.9m. AMPAK Technology's free cash flow improved over the last year, which is generally good to see.
Our Take On AMPAK Technology's Profit Performance
Happily for shareholders, AMPAK Technology produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that AMPAK Technology's statutory profit actually understates its earnings potential! 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'd like to know more about AMPAK Technology as a business, it's important to be aware of any risks it's facing. When we did our research, we found 2 warning signs for AMPAK Technology (1 is concerning!) that we believe deserve your full attention.
This note has only looked at a single factor that sheds light on the nature of AMPAK 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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About TPEX:6546
AMPAK Technology
Engages in the research and development, design, production, and marketing of wireless module in Taiwan.
Flawless balance sheet with high growth potential.