MS AutotechLtd's (KOSDAQ:123040) Soft Earnings Are Actually Better Than They Appear

Soft earnings didn't appear to concern MS Autotech Co.,Ltd's (KOSDAQ:123040) shareholders over the last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

See our latest analysis for MS AutotechLtd

A Closer Look At MS AutotechLtd'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to December 2023, MS AutotechLtd had an accrual ratio of -0.21. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of ₩190b in the last year, which was a lot more than its statutory profit of ₩5.43b. MS AutotechLtd shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On MS AutotechLtd's Profit Performance

As we discussed above, MS AutotechLtd's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that MS AutotechLtd's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. If you'd like to know more about MS AutotechLtd as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 4 warning signs for MS AutotechLtd and you'll want to know about these.

Today we've zoomed in on a single data point to better understand the nature of MS AutotechLtd'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 that insiders are buying.

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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.