Are Miwon Specialty Chemical's (KRX:268280) Statutory Earnings A Good Guide To Its Underlying Profitability?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we'll look at how useful this year's statutory profit is, when analysing Miwon Specialty Chemical (KRX:268280).

We like the fact that Miwon Specialty Chemical made a profit of ₩35.4b on its revenue of ₩363.8b, in the last year.

View our latest analysis for Miwon Specialty Chemical

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. Today, we'll discuss Miwon Specialty Chemical'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 Miwon Specialty Chemical.

A Closer Look At Miwon Specialty Chemical'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to September 2020, Miwon Specialty Chemical recorded an accrual ratio of -0.10. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of ₩57b during the period, dwarfing its reported profit of ₩35.4b. Miwon Specialty Chemical's free cash flow improved over the last year, which is generally good to see.

Our Take On Miwon Specialty Chemical's Profit Performance

As we discussed above, Miwon Specialty Chemical has perfectly satisfactory free cash flow relative to profit. Because of this, we think Miwon Specialty Chemical's earnings potential is at least as good as it seems, and maybe even better! On the other hand, its EPS actually shrunk in the last twelve months. 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. If you'd like to know more about Miwon Specialty Chemical as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 3 warning signs for Miwon Specialty Chemical you should be mindful of and 1 of them is potentially serious.

This note has only looked at a single factor that sheds light on the nature of Miwon Specialty Chemical's profit. But there are plenty of other ways to inform your opinion of a company. 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. 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.

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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.
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