Advanced Nano Products' (KOSDAQ:121600) Problems Go Beyond Poor Profit

After announcing weak earnings, Advanced Nano Products Co., Ltd.'s (KOSDAQ:121600) stock was strong. Despite the market responding positively, we think that there are several concerning factors that investors should be aware of.

View our latest analysis for Advanced Nano Products

Examining Cashflow Against Advanced Nano Products' 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. 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. 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, Advanced Nano Products had an accrual ratio of 0.45. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of ₩16.8b, a look at free cash flow indicates it actually burnt through ₩30b in the last year. We saw that FCF was ₩2.5b a year ago though, so Advanced Nano Products has at least been able to generate positive FCF in the past. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

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.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Advanced Nano Products issued 12% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out Advanced Nano Products' historical EPS growth by clicking on this link.

How Is Dilution Impacting Advanced Nano Products' Earnings Per Share (EPS)?

Advanced Nano Products has improved its profit over the last three years, with an annualized gain of 917% in that time. In comparison, earnings per share only gained 857% over the same period. Net profit actually dropped by 13% in the last year. But the EPS result was even worse, with the company recording a decline of 18%. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Advanced Nano Products' earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On Advanced Nano Products' Profit Performance

In conclusion, Advanced Nano Products has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). For the reasons mentioned above, we think that a perfunctory glance at Advanced Nano Products' statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Advanced Nano Products, you'd also look into what risks it is currently facing. To that end, you should learn about the 3 warning signs we've spotted with Advanced Nano Products (including 1 which is a bit concerning).

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. 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.