Investors Can Find Comfort In Samji Electronics' (KOSDAQ:037460) Earnings Quality

The market for Samji Electronics Co., Ltd.'s (KOSDAQ:037460) shares didn't move much after it posted weak earnings recently. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

View our latest analysis for Samji Electronics

Examining Cashflow Against Samji Electronics' 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 December 2023, Samji Electronics recorded an accrual ratio of -0.22. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of ₩167b during the period, dwarfing its reported profit of ₩32.3b. Given that Samji Electronics had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₩167b would seem to be a step in the right direction.

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

Our Take On Samji Electronics' Profit Performance

Happily for shareholders, Samji Electronics produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Samji Electronics' statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 61% 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. So while earnings quality is important, it's equally important to consider the risks facing Samji Electronics at this point in time. Every company has risks, and we've spotted 2 warning signs for Samji Electronics you should know about.

This note has only looked at a single factor that sheds light on the nature of Samji Electronics' profit. But there are plenty of other ways to inform your opinion of a company. 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. 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.