Earnings Troubles May Signal Larger Issues for A-Jin IndustrialLtd (KOSDAQ:013310) Shareholders

The market wasn't impressed with the soft earnings from A-Jin Industrial Co.,Ltd. (KOSDAQ:013310) recently. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

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A Closer Look At A-Jin IndustrialLtd'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). 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

A-Jin IndustrialLtd has an accrual ratio of 0.22 for the year to March 2025. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Over the last year it actually had negative free cash flow of ₩170b, in contrast to the aforementioned profit of ₩10.6b. We also note that A-Jin IndustrialLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₩170b.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of A-Jin IndustrialLtd.

Our Take On A-Jin IndustrialLtd's Profit Performance

A-Jin IndustrialLtd's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that A-Jin IndustrialLtd's statutory profits are better than its underlying earnings power. 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. If you want to do dive deeper into A-Jin IndustrialLtd, you'd also look into what risks it is currently facing. To help with this, we've discovered 5 warning signs (2 shouldn't be ignored!) that you ought to be aware of before buying any shares in A-Jin IndustrialLtd.

Today we've zoomed in on a single data point to better understand the nature of A-Jin IndustrialLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.