We Wouldn't Rely On COWELL FASHIONLtd's (KOSDAQ:033290) Statutory Earnings As A Guide

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether COWELL FASHIONLtd's (KOSDAQ:033290) statutory profits are a good guide to its underlying earnings.

We like the fact that COWELL FASHIONLtd made a profit of ₩59.2b on its revenue of ₩418.2b, in the last year. One positive is that it has grown both its profit and its revenue, over the last few years.

View our latest analysis for COWELL FASHIONLtd

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. As a result, today we're going to take a closer look at COWELL FASHIONLtd's cashflow, and unusual items, with a view to understanding what these might tell us about its statutory profit. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Zooming In On COWELL FASHIONLtd'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. The ratio shows us how much a company's profit exceeds its FCF.

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

COWELL FASHIONLtd has an accrual ratio of 0.21 for the year to September 2020. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In fact, it had free cash flow of ₩2.2b in the last year, which was a lot less than its statutory profit of ₩59.2b. COWELL FASHIONLtd's free cash flow actually declined over the last year, but it may bounce back next year, since free cash flow is often more volatile than accounting profits. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

The Impact Of Unusual Items On Profit

Given the accrual ratio, it's not overly surprising that COWELL FASHIONLtd's profit was boosted by unusual items worth ₩7.2b in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. If COWELL FASHIONLtd doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On COWELL FASHIONLtd's Profit Performance

Summing up, COWELL FASHIONLtd received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. For the reasons mentioned above, we think that a perfunctory glance at COWELL FASHIONLtd's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into COWELL FASHIONLtd, you'd also look into what risks it is currently facing. Be aware that COWELL FASHIONLtd is showing 2 warning signs in our investment analysis and 1 of those is a bit concerning...

Our examination of COWELL FASHIONLtd has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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. 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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