POSCO STEELEON's (KRX:058430) Performance Is Even Better Than Its Earnings Suggest

POSCO STEELEON Co., Ltd. (KRX:058430) just reported healthy earnings but the stock price didn't move much. Investors are probably missing some underlying factors which are encouraging for the future of the company.

See our latest analysis for POSCO STEELEON

A Closer Look At POSCO STEELEON'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. 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. The ratio shows us how much a company's profit exceeds its FCF.

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

Over the twelve months to March 2024, POSCO STEELEON recorded an accrual ratio of -0.13. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of ₩71b, well over the ₩29.4b it reported in profit. Given that POSCO STEELEON had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₩71b would seem to be a step in the right direction.

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

Our Take On POSCO STEELEON's Profit Performance

POSCO STEELEON's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think POSCO STEELEON's earnings potential is at least as good as it seems, and maybe even better! Better yet, its EPS are growing strongly, which is nice to see. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about POSCO STEELEON as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that POSCO STEELEON has 1 warning sign and it would be unwise to ignore this.

This note has only looked at a single factor that sheds light on the nature of POSCO STEELEON's profit. 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. 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.