Statutory Profit Doesn't Reflect How Good LOT VACUUM's (KOSDAQ:083310) Earnings Are

Investors were underwhelmed by the solid earnings posted by LOT VACUUM Co., Ltd. (KOSDAQ:083310) recently. We have done some analysis and have found some comforting factors beneath the profit numbers.

See our latest analysis for LOT VACUUM

Zooming In On LOT VACUUM's 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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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.

For the year to December 2023, LOT VACUUM had an accrual ratio of -0.12. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of ₩75b during the period, dwarfing its reported profit of ₩53.5b. Notably, LOT VACUUM had negative free cash flow last year, so the ₩75b it produced this year was a welcome improvement.

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

Our Take On LOT VACUUM's Profit Performance

As we discussed above, LOT VACUUM has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that LOT VACUUM's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. Just as investors must consider earnings, it is also important to take into account the strength of a company's balance sheet. We've done some analysis and you can see our take on LOT VACUUM's balance sheet by clicking here.

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