Some Investors May Be Willing To Look Past Answer Technology's (TWSE:3528) Soft Earnings

The market for Answer Technology Co., Ltd.'s (TWSE:3528) shares didn't move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

See our latest analysis for Answer Technology

Examining Cashflow Against Answer Technology'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 March 2024, Answer Technology had an accrual ratio of -0.34. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of NT$1.3b in the last year, which was a lot more than its statutory profit of NT$114.5m. Given that Answer Technology had negative free cash flow in the prior corresponding period, the trailing twelve month resul of NT$1.3b 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 Answer Technology.

Our Take On Answer Technology's Profit Performance

As we discussed above, Answer Technology's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Answer Technology's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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. If you'd like to know more about Answer Technology as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 3 warning signs for Answer Technology and you'll want to know about them.

Today we've zoomed in on a single data point to better understand the nature of Answer Technology'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 with high insider ownership.

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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.