Giga-Byte Technology (TPE:2376) Is Growing Earnings But Are They A Good Guide?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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 Giga-Byte Technology's (TPE:2376) statutory profits are a good guide to its underlying earnings.

We like the fact that Giga-Byte Technology made a profit of NT$3.66b on its revenue of NT$76.9b, in the last year. One positive is that it has grown both its profit and its revenue, over the last few years.

Check out our latest analysis for Giga-Byte Technology

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. Today, we'll discuss Giga-Byte Technology's free cashflow relative to its earnings, and consider what that tells us about the company. 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 Giga-Byte Technology'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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, Giga-Byte Technology had an accrual ratio of -0.38. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of NT$7.7b in the last year, which was a lot more than its statutory profit of NT$3.66b. Giga-Byte Technology shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On Giga-Byte Technology's Profit Performance

Happily for shareholders, Giga-Byte Technology produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Giga-Byte Technology's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at an extremely impressive rate over the 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. If you'd like to know more about Giga-Byte Technology as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 1 warning sign for Giga-Byte Technology and you'll want to know about it.

Today we've zoomed in on a single data point to better understand the nature of Giga-Byte Technology'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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