Concerns Surrounding Chosun RefractoriesLtd's (KRX:462520) Performance

Chosun Refractories Co.,Ltd.'s (KRX:462520) healthy profit numbers didn't contain any surprises for investors. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

See our latest analysis for Chosun RefractoriesLtd

A Closer Look At Chosun RefractoriesLtd'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. 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. The ratio shows us how much a company's profit exceeds its FCF.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to December 2023, Chosun RefractoriesLtd recorded an accrual ratio of 0.34. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. In the last twelve months it actually had negative free cash flow, with an outflow of ₩12b despite its profit of ₩47.2b, mentioned above. As it happens we don't have the data on what Chosun RefractoriesLtd produced by way of free cashflow, the year before, which is a pity.

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

Our Take On Chosun RefractoriesLtd's Profit Performance

As we discussed above, we think Chosun RefractoriesLtd's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Chosun RefractoriesLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. 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 want to do dive deeper into Chosun RefractoriesLtd, you'd also look into what risks it is currently facing. For example, we've found that Chosun RefractoriesLtd has 3 warning signs (2 can't be ignored!) that deserve your attention before going any further with your analysis.

This note has only looked at a single factor that sheds light on the nature of Chosun RefractoriesLtd'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. 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.