The Strong Earnings Posted By HJ Magnolia Yongpyong Hotel & Resort (KRX:070960) Are A Good Indication Of The Strength Of The Business

The subdued stock price reaction suggests that HJ Magnolia Yongpyong Hotel & Resort's (KRX:070960) strong earnings didn't offer any surprises. Our analysis suggests that investors might be missing some promising details.

View our latest analysis for HJ Magnolia Yongpyong Hotel & Resort

A Closer Look At HJ Magnolia Yongpyong Hotel & Resort'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). 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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.

For the year to December 2023, HJ Magnolia Yongpyong Hotel & Resort had an accrual ratio of -0.20. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of ₩105b during the period, dwarfing its reported profit of ₩10.00b. HJ Magnolia Yongpyong Hotel & Resort's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of HJ Magnolia Yongpyong Hotel & Resort.

Our Take On HJ Magnolia Yongpyong Hotel & Resort's Profit Performance

As we discussed above, HJ Magnolia Yongpyong Hotel & Resort'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 HJ Magnolia Yongpyong Hotel & Resort's statutory profit actually understates its earnings potential! And it's also positive that the company showed enough improvement to book a profit this year, after losing money last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Just as investors must consider earnings, it is also important to take into account the strength of a company's balance sheet. If you're interested we have a graphic representation of HJ Magnolia Yongpyong Hotel & Resort's balance sheet.

Today we've zoomed in on a single data point to better understand the nature of HJ Magnolia Yongpyong Hotel & Resort's profit. But there are plenty of other ways to inform your opinion of a company. 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. 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.