We Think Shinpoong Paper Mfg's (KRX:002870) Healthy Earnings Might Be Conservative

Shinpoong Paper Mfg. Co., Ltd's (KRX:002870) solid earnings announcement recently didn't do much to the stock price. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

Check out our latest analysis for Shinpoong Paper Mfg

Zooming In On Shinpoong Paper Mfg's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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".

Shinpoong Paper Mfg has an accrual ratio of 0.27 for the year to March 2024. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of ₩10b, in contrast to the aforementioned profit of ₩2.15b. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₩10b, this year, indicates high risk. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

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

The Impact Of Unusual Items On Profit

Shinpoong Paper Mfg's profit suffered from unusual items, which reduced profit by ₩1.3b in the last twelve months. In the case where this was a non-cash charge it would have made it easier to have high cash conversion, so it's surprising that the accrual ratio tells a different story. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. In the twelve months to March 2024, Shinpoong Paper Mfg had a big unusual items expense. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

Our Take On Shinpoong Paper Mfg's Profit Performance

Shinpoong Paper Mfg saw unusual items weigh on its profit, which should have made it easier to show high cash conversion, which it did not do, according to its accrual ratio. Considering all the aforementioned, we'd venture that Shinpoong Paper Mfg's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. If you'd like to know more about Shinpoong Paper Mfg as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 5 warning signs we've spotted with Shinpoong Paper Mfg (including 2 which shouldn't be ignored).

Our examination of Shinpoong Paper Mfg has focussed on certain factors that can make its earnings look better than they are. 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 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.