We're Not So Sure You Should Rely on CHEMTRONICS.CO.Ltd's (KOSDAQ:089010) Statutory Earnings

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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. In this article, we'll look at how useful this year's statutory profit is, when analysing CHEMTRONICS.CO.Ltd (KOSDAQ:089010).

While CHEMTRONICS.CO.Ltd was able to generate revenue of ₩490.5b in the last twelve months, we think its profit result of ₩10.4b was more important. The good news is that the company managed to grow its revenue over the last three years, and also move from loss-making to profitable.

See our latest analysis for CHEMTRONICS.CO.Ltd

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. As a result, we'll today take a look at how dilution and cashflow shape our understanding of CHEMTRONICS.CO.Ltd's earnings. 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.

A Closer Look At CHEMTRONICS.CO.Ltd's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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.

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 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

CHEMTRONICS.CO.Ltd has an accrual ratio of 0.24 for the year to September 2020. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In the last twelve months it actually had negative free cash flow, with an outflow of ₩41b despite its profit of ₩10.4b, mentioned above. We saw that FCF was ₩18b a year ago though, so CHEMTRONICS.CO.Ltd has at least been able to generate positive FCF in the past. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings. One positive for CHEMTRONICS.CO.Ltd shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. CHEMTRONICS.CO.Ltd expanded the number of shares on issue by 7.1% over the last year. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of CHEMTRONICS.CO.Ltd's EPS by clicking here.

How Is Dilution Impacting CHEMTRONICS.CO.Ltd's Earnings Per Share? (EPS)

Three years ago, CHEMTRONICS.CO.Ltd lost money. Even looking at the last year, profit was still down 33%. Sadly, earnings per share fell further, down a full 40% in that time. So you can see that the dilution has had a bit of an impact on shareholders. Therefore, the dilution is having a noteworthy influence on shareholder returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if CHEMTRONICS.CO.Ltd's earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

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

As it turns out, CHEMTRONICS.CO.Ltd couldn't match its profit with cashflow and its dilution means that shareholders own less of the company than the did before (unless they bought more shares). Considering all this we'd argue CHEMTRONICS.CO.Ltd's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about CHEMTRONICS.CO.Ltd as a business, it's important to be aware of any risks it's facing. For example, CHEMTRONICS.CO.Ltd has 5 warning signs (and 2 which are concerning) we think you should know about.

Our examination of CHEMTRONICS.CO.Ltd has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there are plenty of other ways to inform your opinion of a company. 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 that insiders are buying to be useful.

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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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