Shareholders Can Be Confident That Seoyon Topmetal's (KOSDAQ:019770) Earnings Are High Quality

Even though Seoyon Topmetal Co., Ltd. (KOSDAQ:019770 ) posted strong earnings, investors appeared to be underwhelmed. We have done some analysis and have found some comforting factors beneath the profit numbers.

View our latest analysis for Seoyon Topmetal

Zooming In On Seoyon Topmetal'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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Seoyon Topmetal has an accrual ratio of -0.11 for the year to December 2020. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of ₩18b in the last year, which was a lot more than its statutory profit of ₩5.95b. Given that Seoyon Topmetal had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₩18b would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Seoyon Topmetal.

Our Take On Seoyon Topmetal's Profit Performance

As we discussed above, Seoyon Topmetal has perfectly satisfactory free cash flow relative to profit. Because of this, we think Seoyon Topmetal's earnings potential is at least as good as it seems, and maybe even better! And it's also positive that the company showed enough improvement to book a profit this year, after losing money last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Seoyon Topmetal at this point in time. Every company has risks, and we've spotted 3 warning signs for Seoyon Topmetal (of which 1 is a bit concerning!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Seoyon Topmetal's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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