Is There More To The Story Than Hyosung ITX's (KRX:094280) Earnings Growth?

Broadly speaking, profitable businesses are less risky than unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. This article will consider whether Hyosung ITX's (KRX:094280) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Hyosung ITX made a profit of ₩11.7b on revenue of ₩432.5b. In the chart below, you can see that its profit and revenue have both grown over the last three years.

View our latest analysis for Hyosung ITX

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. Today, we'll discuss Hyosung ITX'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 Hyosung ITX.

A Closer Look At Hyosung ITX'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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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.

For the year to September 2020, Hyosung ITX had an accrual ratio of -0.13. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of ₩22b in the last year, which was a lot more than its statutory profit of ₩11.7b. Hyosung ITX's free cash flow improved over the last year, which is generally good to see.

Our Take On Hyosung ITX's Profit Performance

As we discussed above, Hyosung ITX has perfectly satisfactory free cash flow relative to profit. Because of this, we think Hyosung ITX's earnings potential is at least as good as it seems, and maybe even better! Furthermore, it has done a great job growing EPS over the last year. 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. If you'd like to know more about Hyosung ITX as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Hyosung ITX has 2 warning signs and it would be unwise to ignore them.

This note has only looked at a single factor that sheds light on the nature of Hyosung ITX'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. 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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