Investors Can Find Comfort In Youngone Holdings' (KRX:009970) Earnings Quality

Soft earnings didn't appear to concern Youngone Holdings Co., Ltd.'s (KRX:009970) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

View our latest analysis for Youngone Holdings

A Closer Look At Youngone Holdings' 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). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. 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.

Youngone Holdings has an accrual ratio of -0.12 for the year to December 2020. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of ₩341b, well over the ₩104.9b it reported in profit. Youngone Holdings 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 Youngone Holdings.

Our Take On Youngone Holdings' Profit Performance

As we discussed above, Youngone Holdings has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Youngone Holdings' statutory profit actually understates its earnings potential! And the EPS is up 47% annually, over the last three years. 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. While it's very important to consider the profit and loss statement, you can also learn a lot about a company by looking at its balance sheet. We've done some analysis and you can see our take on Youngone Holdings' balance sheet by clicking here.

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