Kukbo Design's (KOSDAQ:066620) Solid Earnings Are Supported By Other Strong Factors

Kukbo Design Co., Ltd. (KOSDAQ:066620) just reported healthy earnings but the stock price didn't move much. Investors are probably missing some underlying factors which are encouraging for the future of the company.

View our latest analysis for Kukbo Design

Examining Cashflow Against Kukbo Design'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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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 2023, Kukbo Design had an accrual ratio of -0.28. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of ₩42b in the last year, which was a lot more than its statutory profit of ₩27.6b. Kukbo Design's free cash flow improved over the last year, which is generally good to see.

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

Our Take On Kukbo Design's Profit Performance

Happily for shareholders, Kukbo Design produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Kukbo Design's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 41% per year over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Kukbo Design at this point in time. You'd be interested to know, that we found 2 warning signs for Kukbo Design and you'll want to know about these bad boys.

Today we've zoomed in on a single data point to better understand the nature of Kukbo Design's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.