We Like The Quality Of Anam ElectronicsLtd's (KRX:008700) Earnings

Despite posting healthy earnings, Anam Electronics Co.,Ltd.'s (KRX:008700 ) stock has been quite weak. Our analysis suggests that there are some reasons for hope that investors should be aware of.

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Examining Cashflow Against Anam ElectronicsLtd's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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".

For the year to March 2025, Anam ElectronicsLtd had an accrual ratio of -0.16. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of ₩28b, well over the ₩10.9b it reported in profit. Anam ElectronicsLtd's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

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

Our Take On Anam ElectronicsLtd's Profit Performance

As we discussed above, Anam ElectronicsLtd has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Anam ElectronicsLtd's statutory profit actually understates its earnings potential! And the EPS is up 36% over the last twelve months. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 1 warning sign for Anam ElectronicsLtd you should know about.

Today we've zoomed in on a single data point to better understand the nature of Anam ElectronicsLtd's profit. But there are plenty of other ways to inform your opinion of a company. 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. 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.