We Think Nasmedia's (KOSDAQ:089600) Statutory Profit Might Understate Its Earnings Potential

Statistically speaking, it is less risky to invest in profitable companies than in 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 Nasmedia's (KOSDAQ:089600) statutory profits are a good guide to its underlying earnings.

While Nasmedia was able to generate revenue of ₩110.5b in the last twelve months, we think its profit result of ₩21.6b was more important. As you can see in the chart below, its profit has been pretty flat over the last few years, while its revenue has actually declined.

View our latest analysis for Nasmedia

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. So today we'll look at what Nasmedia's cashflow tells us about the quality of its 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.

A Closer Look At Nasmedia'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. 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 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2020, Nasmedia had an accrual ratio of -0.27. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of ₩43b, well over the ₩21.6b it reported in profit. Nasmedia shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On Nasmedia's Profit Performance

As we discussed above, Nasmedia's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Nasmedia's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 20% over the last twelve months. 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. If you want to do dive deeper into Nasmedia, you'd also look into what risks it is currently facing. Case in point: We've spotted 1 warning sign for Nasmedia you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Nasmedia's profit. 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. 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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