Despite strong profits Syncomm Technology Corp. ((GTSM: 3150) Stock hasn’t moved much in the past week. We took a closer look at the numbers and found that shareholders may be grappling with some underlying weaknesses.
Enlarging Syncomm Technology’s bottom line
For high finance, the metric used to measure how well a company is converting reported earnings to free cash flow (FCF) is the Accrual rate (from the cash flow). The accrual rate subtracts the FCF from profit for a given period and divides the result by the company’s average business assets over that period. The ratio shows us how much a company’s profit exceeds its FCF.
That said, a negative accrual rate is a good thing because it shows that the company is bringing in more free cash flow than its bottom line suggests. That is not to say that we should be concerned about a positive accrual rate, but it is worth noting where the accrual rate is quite high. This is because some academic studies have indicated that high provision rates tend to result in lower earnings or lower earnings growth.
In the twelve months to December 2020, Syncomm Technology had a deferral rate of 1.16. This means that nearly enough free cash flow has not been generated to cover the profit. This is usually a bad sign of future profitability. Free cash flow for the past twelve months was NT $ 3.4 million, well below the profit of NT $ 40.2 million. Syncomm Technology shareholders are no doubt hoping that free cash flow will recover next year, as it has declined over the past twelve months. Still, there is more to the story. The accrual rate at least partially reflects the effects of unusual items on the statutory result. On the upside for Syncomm Technology shareholders, the accrual rate was significantly better over the past year, which gives reason to believe that they may return to higher cash conversion in the future. Shareholders should be looking for improved cash flow relative to earnings for the current year, if that is actually the case.
Note: We always recommend investors to check the balance sheet strength. Click here to go to our balance sheet analysis of the Syncomm technology.
The Influence of Unusual Items on Profit
Given the accrual rate, it is not surprising that Syncomm Technology’s profits have increased in the past twelve months due to unusual items valued at NT $ 3.4 million. While we’d like to see profit increases, we’re a little more cautious when unusual items have made a big contribution. When we compiled the numbers from thousands of publicly traded companies, we found that an increase from unusual items is common in any given year Not repeated in the next year. After all, that is exactly what accounting terminology implies. Therefore, assuming these unusual items do not reappear this year, we would expect earnings to be weaker (ie with no business growth) next year.
The profit performance of our Syncomm technology
To sum up, Syncomm Technology got a nice boost to take advantage of unusual items but was unable to balance its paper profits with free cash flow. With that in mind, we would argue that Syncomm Technology’s earnings are likely to give an overly generous impression of sustainable profitability. While the quality of the return is important, it is equally important to consider the risks Syncomm Technology is facing at this point in time. For example, we found that Syncomm has Technology 3 warning signs (1 is important!) That deserve your attention before proceeding with your analysis.
Our research into Syncomm technology has focused on certain factors that can cause profits to look better than they are. And on that basis we are a bit skeptical. But there is always more to discover if you are able to focus on the little things. For example, many people view a high return on equity as an indication of cheap business economics, while others like to follow the money looking for stocks that insiders buy. While it may take a little research on your behalf, this is what you can find free Collection of companies with high return on equity, or This list of stocks that insiders are buying to be useful.
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