Shareholders Can Be Confident That Fortune Information Systems' (TWSE:2468) Earnings Are High Quality

The subdued stock price reaction suggests that Fortune Information Systems Corp's (TWSE:2468) strong earnings didn't offer any surprises. Our analysis suggests that investors might be missing some promising details.

See our latest analysis for Fortune Information Systems

Examining Cashflow Against Fortune Information Systems' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.

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 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to December 2023, Fortune Information Systems had an accrual ratio of -0.22. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of NT$297m in the last year, which was a lot more than its statutory profit of NT$78.4m. Given that Fortune Information Systems had negative free cash flow in the prior corresponding period, the trailing twelve month resul of NT$297m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Fortune Information Systems.

Our Take On Fortune Information Systems' Profit Performance

As we discussed above, Fortune Information Systems' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Fortune Information Systems' 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 have grown at an extremely impressive rate over the last three years. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. You'd be interested to know, that we found 2 warning signs for Fortune Information Systems and you'll want to know about them.

This note has only looked at a single factor that sheds light on the nature of Fortune Information Systems' 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. 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.