Rothwell International's (KOSDAQ:900260) Soft Earnings Are Actually Better Than They Appear

Shareholders appeared unconcerned with Rothwell International Co., Limited's (KOSDAQ:900260) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

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Zooming In On Rothwell International's 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. The ratio shows us how much a company's profit exceeds its FCF.

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 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.

Rothwell International has an accrual ratio of -0.85 for the year to September 2025. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of ₩66b during the period, dwarfing its reported profit of ₩11.3b. Rothwell International's free cash flow improved over the last year, which is generally good to see. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

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

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Rothwell International expanded the number of shares on issue by 28% over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Rothwell International's EPS by clicking here.

A Look At The Impact Of Rothwell International's Dilution On Its Earnings Per Share (EPS)

Rothwell International was losing money three years ago. Even looking at the last year, profit was still down 50%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 50% in the same period. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

In the long term, if Rothwell International's earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Rothwell International's Profit Performance

In conclusion, Rothwell International has a strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share are dropping faster than its profit. Considering all the aforementioned, we'd venture that Rothwell International's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 3 warning signs with Rothwell International, and understanding them should be part of your investment process.

Our examination of Rothwell International has focussed on certain factors that can make its earnings look better than they are. 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 with significant insider holdings to be useful.

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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.