Hsin Kao GasLtd's (TWSE:9931) Earnings Offer More Than Meets The Eye

Hsin Kao Gas Co.,Ltd.'s (TWSE:9931) solid earnings announcement recently didn't do much to the stock price. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

View our latest analysis for Hsin Kao GasLtd

Examining Cashflow Against Hsin Kao GasLtd's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to June 2024, Hsin Kao GasLtd had an accrual ratio of -0.12. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of NT$502m, well over the NT$255.1m it reported in profit. Notably, Hsin Kao GasLtd had negative free cash flow last year, so the NT$502m it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hsin Kao GasLtd.

Our Take On Hsin Kao GasLtd's Profit Performance

As we discussed above, Hsin Kao GasLtd has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Hsin Kao GasLtd's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 30% per year over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Hsin Kao GasLtd as a business, it's important to be aware of any risks it's facing. For example - Hsin Kao GasLtd has 1 warning sign we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Hsin Kao GasLtd'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.