Impressive Earnings May Not Tell The Whole Story For Loop Telecommunication InternationalInc (TWSE:3025)

Unsurprisingly, Loop Telecommunication International,Inc.'s (TWSE:3025) stock price was strong on the back of its healthy earnings report. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

View our latest analysis for Loop Telecommunication InternationalInc

Zooming In On Loop Telecommunication InternationalInc'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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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, Loop Telecommunication InternationalInc had an accrual ratio of 0.37. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of NT$199.7m, a look at free cash flow indicates it actually burnt through NT$5.7m in the last year. It's worth noting that Loop Telecommunication InternationalInc generated positive FCF of NT$299m a year ago, so at least they've done it in the past. The good news for shareholders is that Loop Telecommunication InternationalInc's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Loop Telecommunication InternationalInc.

Our Take On Loop Telecommunication InternationalInc's Profit Performance

As we have made quite clear, we're a bit worried that Loop Telecommunication InternationalInc didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Loop Telecommunication InternationalInc's underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 3 warning signs for Loop Telecommunication InternationalInc you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Loop Telecommunication InternationalInc'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. 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. 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.