NewtreeLtd (KOSDAQ:270870) Is Growing Earnings But Are They A Good 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. Today we'll focus on whether this year's statutory profits are a good guide to understanding NewtreeLtd (KOSDAQ:270870).

While NewtreeLtd was able to generate revenue of ₩170.6b in the last twelve months, we think its profit result of ₩17.5b was more important. In the chart below, you can see that its profit and revenue have both grown over the last three years.

Check out our latest analysis for NewtreeLtd

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. Today, we'll discuss NewtreeLtd's free cashflow relative to its earnings, and consider what that tells us about the company. 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 NewtreeLtd's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2020, NewtreeLtd had an accrual ratio of 0.77. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of ₩17.5b, a look at free cash flow indicates it actually burnt through ₩8.8b in the last year. We also note that NewtreeLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₩8.8b.

Our Take On NewtreeLtd's Profit Performance

As we discussed above, we think NewtreeLtd's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that NewtreeLtd's underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. If you want to do dive deeper into NewtreeLtd, you'd also look into what risks it is currently facing. At Simply Wall St, we found 1 warning sign for NewtreeLtd and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of NewtreeLtd'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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