Here's Why We Think Hansol Logistics' (KRX:009180) Statutory Earnings Might Be Conservative

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. 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. This article will consider whether Hansol Logistics' (KRX:009180) statutory profits are a good guide to its underlying earnings.

We like the fact that Hansol Logistics made a profit of ₩8.59b on its revenue of ₩486.5b, in the last year.

Check out our latest analysis for Hansol Logistics

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. Today, we'll discuss Hansol Logistics' free cashflow relative to its earnings, and consider what that tells us about the company. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hansol Logistics.

Zooming In On Hansol Logistics' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Hansol Logistics has an accrual ratio of -0.39 for the year to September 2020. 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 ₩25b in the last year, which was a lot more than its statutory profit of ₩8.59b. Hansol Logistics shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On Hansol Logistics' Profit Performance

As we discussed above, Hansol Logistics' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Hansol Logistics' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 53% over the last twelve months. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. You'd be interested to know, that we found 2 warning signs for Hansol Logistics and you'll want to know about these.

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