FIT Holding's (TWSE:3712) Earnings Are Of Questionable Quality

Despite posting some strong earnings, the market for FIT Holding Co., Ltd.'s (TWSE:3712) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for FIT Holding

Examining Cashflow Against FIT Holding's 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to June 2024, FIT Holding recorded an accrual ratio of 0.35. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Even though it reported a profit of NT$992.5m, a look at free cash flow indicates it actually burnt through NT$9.8b in the last year. We also note that FIT Holding's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of NT$9.8b.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of FIT Holding.

Our Take On FIT Holding's Profit Performance

As we discussed above, we think FIT Holding's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that FIT Holding's underlying earnings power is lower than its statutory profit. But on the bright side, 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. When we did our research, we found 4 warning signs for FIT Holding (2 are a bit concerning!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of FIT Holding's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 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.