KEPCO Engineering & Construction Company (KRX:052690) Shareholders Should Be Cautious Despite Solid Earnings

KEPCO Engineering & Construction Company, Inc. (KRX:052690) posted some decent earnings, but shareholders didn't react strongly. We think that they might be concerned about some underlying details that our analysis found.

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Zooming In On KEPCO Engineering & Construction Company'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to June 2025, KEPCO Engineering & Construction Company recorded an accrual ratio of 0.35. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. In the last twelve months it actually had negative free cash flow, with an outflow of ₩38b despite its profit of ₩99.3b, mentioned above. We also note that KEPCO Engineering & Construction Company's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₩38b. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Check out our latest analysis for KEPCO Engineering & Construction Company

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.

The Impact Of Unusual Items On Profit

Given the accrual ratio, it's not overly surprising that KEPCO Engineering & Construction Company's profit was boosted by unusual items worth ₩81b in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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. We can see that KEPCO Engineering & Construction Company's positive unusual items were quite significant relative to its profit in the year to June 2025. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On KEPCO Engineering & Construction Company's Profit Performance

KEPCO Engineering & Construction Company had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue KEPCO Engineering & Construction Company's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about KEPCO Engineering & Construction Company as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for KEPCO Engineering & Construction Company you should be aware of.

Our examination of KEPCO Engineering & Construction Company 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. Some people consider a high return on equity to be a good sign of a quality business. 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.