The Strong Earnings Posted By MNtech (KOSDAQ:095500) Are A Good Indication Of The Strength Of The Business

When companies post strong earnings, the stock generally performs well, just like MNtech Co., Ltd.'s (KOSDAQ:095500) stock has recently. We did some digging and found some further encouraging factors that investors will like.

See our latest analysis for MNtech

Examining Cashflow Against MNtech'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). The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to June 2024, MNtech had an accrual ratio of -0.12. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of ₩52b during the period, dwarfing its reported profit of ₩9.75b. Given that MNtech had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₩52b would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of MNtech.

Our Take On MNtech's Profit Performance

As we discussed above, MNtech has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that MNtech'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. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. To help with this, we've discovered 2 warning signs (1 is significant!) that you ought to be aware of before buying any shares in MNtech.

Today we've zoomed in on a single data point to better understand the nature of MNtech'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.