Does Taiwan Chinsan Electronic Industrial's (GTSM:8042) Statutory Profit Adequately Reflect Its Underlying Profit?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. 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 Taiwan Chinsan Electronic Industrial's (GTSM:8042) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Taiwan Chinsan Electronic Industrial made a profit of NT$78.6m on revenue of NT$3.71b.

View our latest analysis for Taiwan Chinsan Electronic Industrial

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. As a result, we think it's well worth considering what Taiwan Chinsan Electronic Industrial'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 Taiwan Chinsan Electronic Industrial.

A Closer Look At Taiwan Chinsan Electronic Industrial's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. The ratio shows us how much a company's profit exceeds its FCF.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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.

For the year to September 2020, Taiwan Chinsan Electronic Industrial had an accrual ratio of -0.15. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of NT$839m in the last year, which was a lot more than its statutory profit of NT$78.6m. Given that Taiwan Chinsan Electronic Industrial had negative free cash flow in the prior corresponding period, the trailing twelve month resul of NT$839m would seem to be a step in the right direction.

Our Take On Taiwan Chinsan Electronic Industrial's Profit Performance

As we discussed above, Taiwan Chinsan Electronic Industrial has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Taiwan Chinsan Electronic Industrial's statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. 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 Taiwan Chinsan Electronic Industrial at this point in time. For instance, we've identified 2 warning signs for Taiwan Chinsan Electronic Industrial (1 is a bit concerning) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Taiwan Chinsan Electronic Industrial's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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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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