Investors Can Find Comfort In C&G Hi Tech's (KOSDAQ:264660) Earnings Quality

Investors were disappointed with the weak earnings posted by C&G Hi Tech Co., Ltd (KOSDAQ:264660 ). However, our analysis suggests that the soft headline numbers are getting counterbalanced by some positive underlying factors.

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A Closer Look At C&G Hi Tech's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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.

Over the twelve months to March 2025, C&G Hi Tech recorded an accrual ratio of -0.18. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of ₩25b in the last year, which was a lot more than its statutory profit of ₩9.86b. Notably, C&G Hi Tech had negative free cash flow last year, so the ₩25b it produced this year was a welcome improvement. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

View our latest analysis for C&G Hi Tech

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of C&G Hi Tech.

How Do Unusual Items Influence Profit?

Surprisingly, given C&G Hi Tech's accrual ratio implied strong cash conversion, its paper profit was actually boosted by ₩1.3b in unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. If C&G Hi Tech doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On C&G Hi Tech's Profit Performance

C&G Hi Tech's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Based on these factors, we think that C&G Hi Tech's profits are a reasonably conservative guide to its underlying profitability. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Our analysis shows 2 warning signs for C&G Hi Tech (1 is a bit unpleasant!) and we strongly recommend you look at them before investing.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. 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 with significant insider holdings to be useful.

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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.