Should You Use WINIADIMCHAELtd's (KOSDAQ:071460) Statutory Earnings To Analyse It?

Broadly speaking, profitable businesses are less risky than unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding WINIADIMCHAELtd (KOSDAQ:071460).

While WINIADIMCHAELtd was able to generate revenue of ₩859.2b in the last twelve months, we think its profit result of ₩14.7b was more important.

Check out our latest analysis for WINIADIMCHAELtd

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. As a result, we think it's well worth considering what WINIADIMCHAELtd's cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of WINIADIMCHAELtd.

A Closer Look At WINIADIMCHAELtd's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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 September 2020, WINIADIMCHAELtd had an accrual ratio of -0.18. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of ₩57b, well over the ₩14.7b it reported in profit. Given that WINIADIMCHAELtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₩57b would seem to be a step in the right direction.

Our Take On WINIADIMCHAELtd's Profit Performance

Happily for shareholders, WINIADIMCHAELtd produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that WINIADIMCHAELtd's statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. 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. If you'd like to know more about WINIADIMCHAELtd as a business, it's important to be aware of any risks it's facing. Our analysis shows 3 warning signs for WINIADIMCHAELtd (1 is significant!) and we strongly recommend you look at these before investing.

Today we've zoomed in on a single data point to better understand the nature of WINIADIMCHAELtd'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. 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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