Jinro Distillers' (KOSDAQ:018120) Strong Earnings Are Of Good Quality

The subdued stock price reaction suggests that Jinro Distillers Co., Ltd.'s (KOSDAQ:018120) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

We've discovered 3 warning signs about Jinro Distillers. View them for free.

Examining Cashflow Against Jinro Distillers' 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). 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'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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.

Jinro Distillers has an accrual ratio of -0.14 for the year to March 2025. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of ₩19b, well over the ₩11.7b it reported in profit. Jinro Distillers shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On Jinro Distillers' Profit Performance

As we discussed above, Jinro Distillers has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Jinro Distillers' statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 57% per year 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 if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. To help with this, we've discovered 3 warning signs (1 is potentially serious!) that you ought to be aware of before buying any shares in Jinro Distillers.

Today we've zoomed in on a single data point to better understand the nature of Jinro Distillers' 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 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.