Is There More To The Story Than MAKUS's (KOSDAQ:093520) Earnings Growth?

As a general rule, we think profitable companies are less risky than companies that lose money. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. This article will consider whether MAKUS' (KOSDAQ:093520) statutory profits are a good guide to its underlying earnings.

While MAKUS was able to generate revenue of ₩79.4b in the last twelve months, we think its profit result of ₩6.82b was more important. Even though its revenue is down over the last three years, its profit has actually increased, as you can see, below.

See our latest analysis for MAKUS

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. So today we'll look at what MAKUS' cashflow tells us about the quality of its earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of MAKUS.

Zooming In On MAKUS' 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). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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.

Over the twelve months to September 2020, MAKUS recorded an accrual ratio of -0.29. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of ₩16b in the last year, which was a lot more than its statutory profit of ₩6.82b. Given that MAKUS had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₩16b would seem to be a step in the right direction.

Our Take On MAKUS' Profit Performance

As we discussed above, MAKUS' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think MAKUS' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 52% annually, over the last three years. 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 MAKUS as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 2 warning signs for MAKUS and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of MAKUS' 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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