Statutory Earnings May Not Be The Best Way To Understand Ahn-Gook Pharmaceutical's (KOSDAQ:001540) True Position

We didn't see Ahn-Gook Pharmaceutical Co., Ltd.'s (KOSDAQ:001540) stock surge when it reported robust earnings recently. We looked deeper into the numbers and found that shareholders might be concerned with some underlying weaknesses.

View our latest analysis for Ahn-Gook Pharmaceutical

A Closer Look At Ahn-Gook Pharmaceutical'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 June 2024, Ahn-Gook Pharmaceutical had an accrual ratio of 0.56. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of ₩84b despite its profit of ₩15.3b, mentioned above. We saw that FCF was ₩3.8b a year ago though, so Ahn-Gook Pharmaceutical has at least been able to generate positive FCF in the past. 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 Ahn-Gook Pharmaceutical.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Ahn-Gook Pharmaceutical's profit was boosted by unusual items worth ₩14b in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. Ahn-Gook Pharmaceutical had a rather significant contribution from unusual items relative to its profit to June 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Ahn-Gook Pharmaceutical's Profit Performance

Ahn-Gook Pharmaceutical had a weak accrual ratio, but its profit did receive a boost from unusual items. On reflection, the above-mentioned factors give us the strong impression that Ahn-Gook Pharmaceutical'sunderlying earnings power is not as good as it might seem, based on the statutory profit numbers. If you'd like to know more about Ahn-Gook Pharmaceutical as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 3 warning signs for Ahn-Gook Pharmaceutical (of which 1 doesn't sit too well with us!) you should know about.

Our examination of Ahn-Gook Pharmaceutical has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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 with high insider ownership.

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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.