Advanced Process Systems' (KOSDAQ:265520) Conservative Accounting Might Explain Soft Earnings

The market was pleased with the recent earnings report from Advanced Process Systems Corporation (KOSDAQ:265520), despite the profit numbers being soft. We think that investors might be looking at some positive factors beyond the earnings numbers.

See our latest analysis for Advanced Process Systems

A Closer Look At Advanced Process Systems' 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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".

For the year to June 2024, Advanced Process Systems had an accrual ratio of -0.30. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of ₩130b during the period, dwarfing its reported profit of ₩64.1b. Notably, Advanced Process Systems had negative free cash flow last year, so the ₩130b it produced this year was a welcome improvement.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Advanced Process Systems' Profit Performance

Happily for shareholders, Advanced Process Systems produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Advanced Process Systems' statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 64% per year over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into Advanced Process Systems, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 1 warning sign with Advanced Process Systems, and understanding it should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Advanced Process Systems' 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. 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.