DeviceENG.CO.Ltd's (KOSDAQ:187870) Earnings Are Growing But Is There More To The Story?

As a general rule, we think profitable companies are less risky than companies that lose money. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding DeviceENG.CO.Ltd (KOSDAQ:187870).

We like the fact that DeviceENG.CO.Ltd made a profit of ₩31.2b on its revenue of ₩114.9b, in the last year. As depicted below, while its revenue may have fallen over the last few years, its profit actually improved.

Check out our latest analysis for DeviceENG.CO.Ltd

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. Today, we'll discuss DeviceENG.CO.Ltd's free cashflow relative to its earnings, and consider what that tells us about the company. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of DeviceENG.CO.Ltd.

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

Over the twelve months to September 2020, DeviceENG.CO.Ltd recorded an accrual ratio of -1.58. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of ₩62b in the last year, which was a lot more than its statutory profit of ₩31.2b. DeviceENG.CO.Ltd's free cash flow improved over the last year, which is generally good to see.

Our Take On DeviceENG.CO.Ltd's Profit Performance

As we discussed above, DeviceENG.CO.Ltd's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think DeviceENG.CO.Ltd's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 1 warning sign for DeviceENG.CO.Ltd you should know about.

Today we've zoomed in on a single data point to better understand the nature of DeviceENG.CO.Ltd'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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