Some Investors May Be Willing To Look Past Rayence's (KOSDAQ:228850) Soft Earnings

Shareholders appeared unconcerned with Rayence Co., Ltd.'s (KOSDAQ:228850) lackluster earnings report last week. We did some digging, and we believe the earnings are stronger than they seem.

Examining Cashflow Against Rayence'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.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Rayence has an accrual ratio of -0.10 for the year to December 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of ₩17b in the last year, which was a lot more than its statutory profit of ₩7.83b. Rayence did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.

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 Rayence's Profit Performance

As we discussed above, Rayence has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Rayence's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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 want to do dive deeper into Rayence, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 3 warning signs with Rayence, and understanding them should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Rayence'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. 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.