KUMHO Engineering & Construction's (KRX:002990) Solid Earnings Are Supported By Other Strong Factors

The subdued stock price reaction suggests that KUMHO Engineering & Construction Co., Ltd.'s (KRX:002990) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

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A Closer Look At KUMHO Engineering & Construction'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. 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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 September 2025, KUMHO Engineering & Construction had an accrual ratio of -0.38. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of ₩145b during the period, dwarfing its reported profit of ₩23.8b. Given that KUMHO Engineering & Construction had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₩145b would seem to be a step in the right direction. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

See our latest analysis for KUMHO Engineering & Construction

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

How Do Unusual Items Influence Profit?

KUMHO Engineering & Construction's profit was reduced by unusual items worth ₩10b in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. In a scenario where those unusual items included non-cash charges, we'd expect to see a strong accrual ratio, which is exactly what has happened in this case. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect KUMHO Engineering & Construction to produce a higher profit next year, all else being equal.

Our Take On KUMHO Engineering & Construction's Profit Performance

In conclusion, both KUMHO Engineering & Construction's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. After considering all this, we reckon KUMHO Engineering & Construction's statutory profit probably understates its earnings potential! 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 1 warning sign for KUMHO Engineering & Construction and you'll want to know about this.

After our examination into the nature of KUMHO Engineering & Construction's profit, we've come away optimistic for the company. 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.