Concerns Surrounding Ecoeye's (KOSDAQ:448280) Performance

Ecoeye Co., Ltd.'s (KOSDAQ:448280) healthy profit numbers didn't contain any surprises for investors. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

See our latest analysis for Ecoeye

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

Ecoeye has an accrual ratio of 0.51 for the year to December 2023. 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. Over the last year it actually had negative free cash flow of ₩1.4b, in contrast to the aforementioned profit of ₩15.7b. Unfortunately, we don't have data on Ecoeye's free cash flow for the prior year; that's not necessarily a bad thing, though we do generally prefer to be able to see a bit of a company's history.

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

Our Take On Ecoeye's Profit Performance

As we have made quite clear, we're a bit worried that Ecoeye didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Ecoeye's underlying earnings power is lower than its statutory profit. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Ecoeye at this point in time. For instance, we've identified 2 warning signs for Ecoeye (1 can't be ignored) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Ecoeye'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 that insiders are buying.

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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.