GMI Technology Co., Ltd. (TWSE:3312)'s share price was strong despite releasing a weak earnings report last week. However, we believe there are signs that things are more promising than they seem.

Check out our latest analysis for GMI Technology.

Earnings and revenue history
TWSE:3312 Earnings and Revenue History March 22, 2024

Consideration of cash flow for GMI Technology's earnings

One of the key financial ratios used to measure how well a company converts its profits into free cash flow (FCF). Incidence. The accrual ratio subtracts his FCF from the profit for a particular period and divides the result by the company's average operating assets for that period. This ratio shows how much a company's profit exceeds its FCF.

So if a company has a negative accrual ratio, it's actually a good thing, and if the accrual ratio is positive, it's a bad thing. This does not suggest that you need to worry about positive accruals, but it is worth noting if the accruals are fairly high. In particular, there is some academic evidence to suggest that, generally speaking, high accrual rates bode poorly for short-term profits.

GMI Technology's accrual ratio for the year to December 2023 was -0.33. Therefore, its statutory earnings are significantly less than its free cash flow. In fact, over the past 12 months, the company reported free cash flow of his NT$1.5 billion, much higher than the NT$322.4 million he reported as profit. Notably, GMI Technology had negative free cash flow last year, so his NT$1.5 billion produced this year was a welcome improvement.

Note: Investors are always advised to check the health of a company's balance sheet. Click here to see GMI Technology's balance sheet analysis.

Our take on GMI Technology's earnings performance

As explained above, GMI Technology's accrual ratio indicates that it is converting profits into free cash flow significantly, which is positive for the company. Based on this observation, we think GMI Technology's statutory profit may actually understate its earnings potential. Additionally, EPS has grown 38% annually over the past three years. After all, if you want to understand a company correctly, it is essential to consider more than just the above factors. Considering this, if you want to perform further analysis on a company, it is important to be informed about the risks involved. Notice that GMI Technology is listed. 2 warning signs in investment analysis One of them…

Today we've focused on a single data point to better understand the nature of GMI Technology's earnings. But if you can focus your attention on the details, there is always more to discover. Some consider a high return on equity to be a good sign of a high-quality business.It may take a little research on your behalf, but you may find the following free A collection of companies with a high return on equity, or a list of stocks that insiders are buying to help.

Valuation is complex, but we help make it simple.

Please check it out GMI Technology Could be overvalued or undervalued, check out our comprehensive analysis. Fair value estimates, risks and caveats, dividends, insider trading, and financial health.

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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.

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