Some May Be Optimistic About ASROCK Incorporation's (TWSE:3515) Earnings

The most recent earnings report from ASROCK Incorporation (TWSE:3515) was disappointing for shareholders. However, our analysis suggests that the soft headline numbers are getting counterbalanced by some positive underlying factors.

View our latest analysis for ASROCK Incorporation

A Closer Look At ASROCK Incorporation'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. 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. 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".

Over the twelve months to December 2023, ASROCK Incorporation recorded an accrual ratio of -0.35. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of NT$2.6b in the last year, which was a lot more than its statutory profit of NT$919.0m. ASROCK Incorporation's free cash flow improved over the last year, which is generally good to see.

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 ASROCK Incorporation's Profit Performance

As we discussed above, ASROCK Incorporation's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think ASROCK Incorporation's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! On the other hand, its EPS actually shrunk in the last twelve months. 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 ASROCK Incorporation as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 2 warning signs for ASROCK Incorporation (of which 1 is significant!) you should know about.

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