Shaky Earnings May Not Tell The Whole Story For Hurum (KOSDAQ:353190)

Hurum Co., Ltd. (KOSDAQ:353190) recently posted soft earnings but shareholders didn't react strongly. Our analysis suggests that they may be missing some concerning details underlying the profit numbers.

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Examining Cashflow Against Hurum'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.

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

Hurum has an accrual ratio of 0.22 for the year to December 2024. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of ₩1.76b, a look at free cash flow indicates it actually burnt through ₩9.1b in the last year. We also note that Hurum's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₩9.1b. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

See our latest analysis for Hurum

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

How Do Unusual Items Influence Profit?

The fact that the company had unusual items boosting profit by ₩2.1b, in the last year, probably goes some way to explain why its accrual ratio was so weak. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. Hurum had a rather significant contribution from unusual items relative to its profit to December 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Hurum's Profit Performance

Hurum had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Hurum's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Hurum at this point in time. To that end, you should learn about the 3 warning signs we've spotted with Hurum (including 1 which is concerning).

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.