We Think That There Are More Issues For A-Jin IndustrialLtd (KOSDAQ:013310) Than Just Sluggish Earnings

The subdued market reaction suggests that A-Jin Industrial Co.,Ltd.'s (KOSDAQ:013310) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.

See our latest analysis for A-Jin IndustrialLtd

Zooming In On A-Jin IndustrialLtd'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. The ratio shows us how much a company's profit exceeds its FCF.

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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to September 2024, A-Jin IndustrialLtd recorded an accrual ratio of 0.38. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of ₩224b, in contrast to the aforementioned profit of ₩27.0b. We saw that FCF was ₩29b a year ago though, so A-Jin IndustrialLtd has at least been able to generate positive FCF in the past.

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

As we discussed above, we think A-Jin IndustrialLtd'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 A-Jin IndustrialLtd'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. 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 want to do dive deeper into A-Jin IndustrialLtd, you'd also look into what risks it is currently facing. Be aware that A-Jin IndustrialLtd is showing 5 warning signs in our investment analysis and 2 of those make us uncomfortable...

Today we've zoomed in on a single data point to better understand the nature of A-Jin IndustrialLtd'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.