We're Not Counting On Korea Electric Power Industrial Development (KRX:130660) To Sustain Its Statutory Profitability

Broadly speaking, profitable businesses are less risky than unprofitable ones. 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. In this article, we'll look at how useful this year's statutory profit is, when analysing Korea Electric Power Industrial Development (KRX:130660).

We like the fact that Korea Electric Power Industrial Development made a profit of ₩17.0b on its revenue of ₩336.8b, in the last year. One positive is that it has grown both its profit and its revenue, over the last few years.

See our latest analysis for Korea Electric Power Industrial Development

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. As a result, we think it's well worth considering what Korea Electric Power Industrial Development's cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Korea Electric Power Industrial Development.

A Closer Look At Korea Electric Power Industrial Development's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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'.

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. 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".

Korea Electric Power Industrial Development has an accrual ratio of 0.31 for the year to June 2020. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Over the last year it actually had negative free cash flow of ₩6.2b, in contrast to the aforementioned profit of ₩17.0b. We saw that FCF was ₩3.8b a year ago though, so Korea Electric Power Industrial Development has at least been able to generate positive FCF in the past.

Our Take On Korea Electric Power Industrial Development's Profit Performance

Korea Electric Power Industrial Development didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Korea Electric Power Industrial Development's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 37% per annum growth in EPS for the last three. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Korea Electric Power Industrial Development (including 2 which don't sit too well with us).

Today we've zoomed in on a single data point to better understand the nature of Korea Electric Power Industrial Development's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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