Hanchang Ind.Co.Ltd's (KOSDAQ:079170) Soft Earnings Don't Show The Whole Picture

Soft earnings didn't appear to concern Hanchang Ind.Co.,Ltd's (KOSDAQ:079170) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for Hanchang Ind.Co.Ltd

Zooming In On Hanchang Ind.Co.Ltd's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.

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

Hanchang Ind.Co.Ltd has an accrual ratio of -0.10 for the year to March 2024. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. Indeed, in the last twelve months it reported free cash flow of ₩7.5b, well over the ₩2.41b it reported in profit. Hanchang Ind.Co.Ltd 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 Hanchang Ind.Co.Ltd.

Our Take On Hanchang Ind.Co.Ltd's Profit Performance

As we discussed above, Hanchang Ind.Co.Ltd has perfectly satisfactory free cash flow relative to profit. Because of this, we think Hanchang Ind.Co.Ltd's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 63% annually, over the last three years. 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 want to do dive deeper into Hanchang Ind.Co.Ltd, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 2 warning signs with Hanchang Ind.Co.Ltd, and understanding them should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Hanchang Ind.Co.Ltd's profit. But there are plenty of other ways to inform your opinion of a company. 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 with significant insider holdings to be useful.

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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.