Additional Considerations Required While Assessing Seojin AutomotiveLtd's (KOSDAQ:122690) Strong Earnings

Seojin Automotive Co.,Ltd. (KOSDAQ:122690) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Check out our latest analysis for Seojin AutomotiveLtd

Zooming In On Seojin AutomotiveLtd'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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.

Seojin AutomotiveLtd has an accrual ratio of 0.23 for the year to December 2023. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of ₩128b, in contrast to the aforementioned profit of ₩8.77b. We saw that FCF was ₩11b a year ago though, so Seojin AutomotiveLtd has at least been able to generate positive FCF in the past. The good news for shareholders is that Seojin AutomotiveLtd's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

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

Our Take On Seojin AutomotiveLtd's Profit Performance

Seojin AutomotiveLtd'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 Seojin AutomotiveLtd's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 17% EPS growth in the last year. 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. So while earnings quality is important, it's equally important to consider the risks facing Seojin AutomotiveLtd at this point in time. Every company has risks, and we've spotted 3 warning signs for Seojin AutomotiveLtd (of which 2 are significant!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Seojin AutomotiveLtd'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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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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.