Namkwang Engineering & Construction's (KRX:001260) Weak Earnings May Only Reveal A Part Of The Whole Picture

Namkwang Engineering & Construction Co., Ltd.'s (KRX:001260) recent weak earnings report didn't cause a big stock movement. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

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Examining Cashflow Against Namkwang Engineering & Construction'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. 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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to June 2025, Namkwang Engineering & Construction had an accrual ratio of 0.44. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of ₩36b, in contrast to the aforementioned profit of ₩5.92b. It's worth noting that Namkwang Engineering & Construction generated positive FCF of ₩48b a year ago, so at least they've done it in the past. One positive for Namkwang Engineering & Construction shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Namkwang Engineering & Construction.

Our Take On Namkwang Engineering & Construction's Profit Performance

As we discussed above, we think Namkwang Engineering & Construction's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Namkwang Engineering & Construction's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. 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. If you'd like to know more about Namkwang Engineering & Construction as a business, it's important to be aware of any risks it's facing. For instance, we've identified 3 warning signs for Namkwang Engineering & Construction (1 is concerning) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Namkwang Engineering & Construction'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 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.