ECSTELECOM's (KOSDAQ:067010) Earnings Are Growing But Is There More To The Story?

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. Today we'll focus on whether this year's statutory profits are a good guide to understanding ECSTELECOM (KOSDAQ:067010).

It's good to see that over the last twelve months ECSTELECOM made a profit of ₩4.95b on revenue of ₩80.3b. In the chart below, you can see that its profit and revenue have both grown over the last three years.

Check out our latest analysis for ECSTELECOM

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. So today we'll look at what ECSTELECOM's 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 ECSTELECOM.

Zooming In On ECSTELECOM'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). 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to September 2020, ECSTELECOM recorded an accrual ratio of -0.45. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of ₩10b in the last year, which was a lot more than its statutory profit of ₩4.95b. ECSTELECOM's free cash flow improved over the last year, which is generally good to see.

Our Take On ECSTELECOM's Profit Performance

As we discussed above, ECSTELECOM's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think ECSTELECOM's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Better yet, its EPS are growing strongly, which is nice to see. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about ECSTELECOM as a business, it's important to be aware of any risks it's facing. For instance, we've identified 3 warning signs for ECSTELECOM (1 shouldn't be ignored) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of ECSTELECOM's profit. 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. 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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