Sebo Manufacturing Engineering & Construction's (KOSDAQ:011560) Earnings Offer More Than Meets The Eye

Sebo Manufacturing, Engineering & Construction Corp.'s (KOSDAQ:011560) solid earnings announcement recently didn't do much to the stock price. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

Check out our latest analysis for Sebo Manufacturing Engineering & Construction

A Closer Look At Sebo Manufacturing Engineering & Construction'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Sebo Manufacturing Engineering & Construction has an accrual ratio of -0.12 for the year to December 2023. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. Indeed, in the last twelve months it reported free cash flow of ₩56b, well over the ₩30.2b it reported in profit. Notably, Sebo Manufacturing Engineering & Construction had negative free cash flow last year, so the ₩56b it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sebo Manufacturing Engineering & Construction.

Our Take On Sebo Manufacturing Engineering & Construction's Profit Performance

Sebo Manufacturing Engineering & Construction's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Sebo Manufacturing Engineering & Construction's earnings potential is at least as good as it seems, and maybe even better! And on top of that, 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example - Sebo Manufacturing Engineering & Construction has 2 warning signs we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Sebo Manufacturing Engineering & Construction'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. 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.