Should You Use China Crystal New Material HoldingsLtd's (KOSDAQ:900250) Statutory Earnings To Analyse It?

Broadly speaking, profitable businesses are less risky than unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether China Crystal New Material HoldingsLtd's (KOSDAQ:900250) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months China Crystal New Material HoldingsLtd made a profit of ₩24.1b on revenue of ₩89.9b. The chart below shows how it has grown revenue over the last three years, but that profit has declined.

See our latest analysis for China Crystal New Material HoldingsLtd

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. Today, we'll discuss China Crystal New Material HoldingsLtd's free cashflow relative to its earnings, and consider what that tells us about the company. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of China Crystal New Material HoldingsLtd.

Zooming In On China Crystal New Material HoldingsLtd'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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to September 2020, China Crystal New Material HoldingsLtd recorded an accrual ratio of 0.27. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In the last twelve months it actually had negative free cash flow, with an outflow of ₩23b despite its profit of ₩24.1b, mentioned above. We saw that FCF was ₩20b a year ago though, so China Crystal New Material HoldingsLtd has at least been able to generate positive FCF in the past.

Our Take On China Crystal New Material HoldingsLtd's Profit Performance

China Crystal New Material HoldingsLtd's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Therefore, it seems possible to us that China Crystal New Material HoldingsLtd's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 7.9% EPS growth in the 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. In terms of investment risks, we've identified 2 warning signs with China Crystal New Material HoldingsLtd, 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 China Crystal New Material HoldingsLtd's profit. 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. 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.

If you decide to trade China Crystal New Material HoldingsLtd, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.