Genius Electronic Optical (TWSE:3406) Is Posting Promising Earnings But The Good News Doesn’t Stop There

Investors signalled that they were pleased with Genius Electronic Optical Co., Ltd's (TWSE:3406) most recent earnings report. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

Check out our latest analysis for Genius Electronic Optical

A Closer Look At Genius Electronic Optical'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). 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Genius Electronic Optical has an accrual ratio of -0.14 for the year to March 2024. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of NT$6.8b in the last year, which was a lot more than its statutory profit of NT$3.92b. Notably, Genius Electronic Optical had negative free cash flow last year, so the NT$6.8b it produced this year was a welcome improvement.

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 Genius Electronic Optical's Profit Performance

Genius Electronic Optical's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Genius Electronic Optical's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 37% annually, over the last three years. 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. So while earnings quality is important, it's equally important to consider the risks facing Genius Electronic Optical at this point in time. Be aware that Genius Electronic Optical is showing 2 warning signs in our investment analysis and 1 of those is a bit concerning...

Today we've zoomed in on a single data point to better understand the nature of Genius Electronic Optical's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with significant insider holdings 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.