We Like The Quality Of ASUSTeK Computer's (TWSE:2357) Earnings

The market seemed underwhelmed by the solid earnings posted by ASUSTeK Computer Inc. (TWSE:2357) recently. We have done some analysis, and found some encouraging factors that we believe the shareholders should consider.

See our latest analysis for ASUSTeK Computer

Zooming In On ASUSTeK Computer'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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 December 2023, ASUSTeK Computer had an accrual ratio of -0.18. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of NT$52b in the last year, which was a lot more than its statutory profit of NT$15.9b. Given that ASUSTeK Computer had negative free cash flow in the prior corresponding period, the trailing twelve month resul of NT$52b would seem to be a step in the right direction.

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.

Our Take On ASUSTeK Computer's Profit Performance

As we discussed above, ASUSTeK Computer's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think ASUSTeK Computer's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share increased by 8.4% in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about ASUSTeK Computer 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 ASUSTeK Computer and you'll want to know about this.

Today we've zoomed in on a single data point to better understand the nature of ASUSTeK Computer'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.