We Think KEPCO Plant Service & EngineeringLtd's (KRX:051600) Solid Earnings Are Understated

KEPCO Plant Service & Engineering Co.,Ltd. (KRX:051600) announced a healthy earnings result recently, and the market rewarded it with a strong uplift in the stock price. According to our analysis of the report, the strong headline profit numbers are supported by strong earnings fundamentals.

See our latest analysis for KEPCO Plant Service & EngineeringLtd

A Closer Look At KEPCO Plant Service & EngineeringLtd'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.

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.

For the year to December 2024, KEPCO Plant Service & EngineeringLtd had an accrual ratio of -0.30. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of ₩489b during the period, dwarfing its reported profit of ₩172.4b. Given that KEPCO Plant Service & EngineeringLtd had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₩489b would seem to be a step in the right direction.

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.

Our Take On KEPCO Plant Service & EngineeringLtd's Profit Performance

As we discussed above, KEPCO Plant Service & EngineeringLtd's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think KEPCO Plant Service & EngineeringLtd's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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 KEPCO Plant Service & EngineeringLtd at this point in time. At Simply Wall St, we found 1 warning sign for KEPCO Plant Service & EngineeringLtd and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of KEPCO Plant Service & EngineeringLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.