We're Not Counting On Daesung Microbiological Labs (KOSDAQ:036480) To Sustain Its Statutory Profitability

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. That said, the current statutory profit is not always a good guide to a company's underlying profitability. Today we'll focus on whether this year's statutory profits are a good guide to understanding Daesung Microbiological Labs (KOSDAQ:036480).

It's good to see that over the last twelve months Daesung Microbiological Labs made a profit of ₩2.44b on revenue of ₩25.4b. Below, you can see that both its revenue and its profit have fallen over the last three years.

Check out our latest analysis for Daesung Microbiological Labs

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. So today we'll look at what Daesung Microbiological Labs' cashflow tells us about the quality of its earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Daesung Microbiological Labs.

A Closer Look At Daesung Microbiological Labs' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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 September 2020, Daesung Microbiological Labs recorded an accrual ratio of 0.36. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of ₩10b despite its profit of ₩2.44b, mentioned above. We also note that Daesung Microbiological Labs' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₩10b.

Our Take On Daesung Microbiological Labs' Profit Performance

As we have made quite clear, we're a bit worried that Daesung Microbiological Labs didn't back up the last year's profit with free cashflow. For this reason, we think that Daesung Microbiological Labs' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Sadly, its EPS was down over 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 want to do dive deeper into Daesung Microbiological Labs, you'd also look into what risks it is currently facing. For instance, we've identified 5 warning signs for Daesung Microbiological Labs (3 make us uncomfortable) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Daesung Microbiological Labs' 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. 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 that insiders are buying to be useful.

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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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