Why DY DEOKYANGLtd's (KRX:024900) Healthy Earnings Aren’t As Good As They Seem

Investors appear disappointed with DY DEOKYANG Co.,Ltd.'s (KRX:024900) recent earnings, despite the decent statutory profit number. Our analysis has found some underlying factors which may be cause for concern.

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Zooming In On DY DEOKYANGLtd's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to March 2025, DY DEOKYANGLtd had an accrual ratio of 1.37. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of ₩17.0b, a look at free cash flow indicates it actually burnt through ₩53b in the last year. It's worth noting that DY DEOKYANGLtd generated positive FCF of ₩52b a year ago, so at least they've done it in the past. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio. The good news for shareholders is that DY DEOKYANGLtd's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Check out our latest analysis for DY DEOKYANGLtd

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

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that DY DEOKYANGLtd's profit was boosted by unusual items worth ₩705m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On DY DEOKYANGLtd's Profit Performance

Summing up, DY DEOKYANGLtd received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue DY DEOKYANGLtd's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing DY DEOKYANGLtd at this point in time. For instance, we've identified 3 warning signs for DY DEOKYANGLtd (1 makes us a bit uncomfortable) you should be familiar with.

Our examination of DY DEOKYANGLtd has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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 with high insider ownership.

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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.