Solid Earnings May Not Tell The Whole Story For WooDeumGee Farm (KOSDAQ:403490)

The stock price didn't jump after WooDeumGee Farm Co., Ltd (KOSDAQ:403490) posted decent earnings last week. We think that investors might be worried about some concerning underlying factors.

Check out our latest analysis for WooDeumGee Farm

Examining Cashflow Against WooDeumGee Farm'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. 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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

WooDeumGee Farm has an accrual ratio of 0.49 for the year to December 2023. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of ₩1.45b, a look at free cash flow indicates it actually burnt through ₩8.9b in the last year. Unfortunately, we don't have data on WooDeumGee Farm'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 WooDeumGee Farm.

Our Take On WooDeumGee Farm's Profit Performance

As we have made quite clear, we're a bit worried that WooDeumGee Farm didn't back up the last year's profit with free cashflow. For this reason, we think that WooDeumGee Farm's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. 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. If you'd like to know more about WooDeumGee Farm as a business, it's important to be aware of any risks it's facing. When we did our research, we found 3 warning signs for WooDeumGee Farm (1 is potentially serious!) that we believe deserve your full attention.

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