The Strong Earnings Posted By ATEC MOBILITY (KOSDAQ:224110) Are A Good Indication Of The Strength Of The Business

Even though ATEC MOBILITY Co., Ltd's (KOSDAQ:224110) recent earnings release was robust, the market didn't seem to notice. We think that investors have missed some encouraging factors underlying the profit figures.

Check out our latest analysis for ATEC MOBILITY

Examining Cashflow Against ATEC MOBILITY'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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

ATEC MOBILITY has an accrual ratio of -0.10 for the year to December 2023. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of ₩15b during the period, dwarfing its reported profit of ₩6.44b. ATEC MOBILITY shareholders are no doubt pleased that free cash flow improved over the last twelve months. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

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

How Do Unusual Items Influence Profit?

ATEC MOBILITY's profit was reduced by unusual items worth ₩3.3b in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. If ATEC MOBILITY doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On ATEC MOBILITY's Profit Performance

In conclusion, both ATEC MOBILITY's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Based on these factors, we think ATEC MOBILITY's earnings potential is at least as good as it seems, and maybe even better! If you'd like to know more about ATEC MOBILITY as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 3 warning signs for ATEC MOBILITY and you'll want to know about these.

After our examination into the nature of ATEC MOBILITY's profit, we've come away optimistic for the company. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.