Gyeongnam Steel's (KOSDAQ:039240) Earnings Offer More Than Meets The Eye

Gyeongnam Steel Co., Ltd's (KOSDAQ:039240) solid earnings announcement recently didn't do much to the stock price. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

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Examining Cashflow Against Gyeongnam Steel'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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Gyeongnam Steel has an accrual ratio of -0.10 for the year to September 2025. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of ₩20b, well over the ₩8.01b it reported in profit. Gyeongnam Steel 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 Gyeongnam Steel.

Our Take On Gyeongnam Steel's Profit Performance

As we discussed above, Gyeongnam Steel has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Gyeongnam Steel's statutory profit actually understates its earnings potential! And the EPS is up 11% over the last twelve months. 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. If you'd like to know more about Gyeongnam Steel as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 1 warning sign for Gyeongnam Steel you should be aware of.

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