Beyond Lackluster Earnings: Potential Concerns For Wonlim's (KRX:005820) Shareholders

Shareholders didn't appear too concerned by Wonlim Corporation's (KRX:005820) weak earnings. We did some analysis and found some concerning details beneath the statutory profit number.

Check out our latest analysis for Wonlim

The Power Of Non-Operating Revenue

At most companies, some revenue streams, such as government grants, are accounted for as non-operating revenue, while the core business is said to produce operating revenue. Where possible, we prefer rely on operating revenue to get a better understanding of how the business is functioning. Importantly, the non-operating revenue often comes without associated ongoing costs, so it can boost profit by letting it fall straight to the bottom line, making the operating business seem better than it really is. It's worth noting that Wonlim saw a big increase in non-operating revenue over the last year. Indeed, its non-operating revenue rose from ₩5.26b last year to ₩9.65b this year. If that non-operating revenue fails to manifest in the current year, then there's a real risk the bottom line profit result will be impacted negatively. In order to better understand a company's profit result, it can sometimes help to consider whether the result would be very different without a sudden increase in non-operating revenue.

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

How Do Unusual Items Influence Profit?

As well as that spike in non-operating revenue, we should also consider the ₩3.5b boost to profit coming from unusual items, over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. Wonlim had a rather significant contribution from unusual items relative to its profit to September 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 Wonlim's Profit Performance

In its last report Wonlim benefitted from a spike in non-operating revenue which may have boosted its profit in a way that may be no more sustainable than low quality coal mining. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated and everything else is equal. For the reasons mentioned above, we think that a perfunctory glance at Wonlim's statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Wonlim at this point in time. In terms of investment risks, we've identified 3 warning signs with Wonlim, and understanding them should be part of your investment process.

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 is always more to discover if you are capable of focussing your mind on minutiae. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.