Some May Be Optimistic About Actoz SoftLtd's (KOSDAQ:052790) Earnings

Soft earnings didn't appear to concern Actoz Soft Co.,Ltd.'s (KOSDAQ:052790) shareholders over the last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

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A Closer Look At Actoz SoftLtd'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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".

Actoz SoftLtd has an accrual ratio of -0.65 for the year to September 2025. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of ₩86b in the last year, which was a lot more than its statutory profit of ₩16.9b. Actoz SoftLtd shareholders are no doubt pleased that free cash flow improved over the last twelve months. 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.

View our latest analysis for Actoz SoftLtd

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

How Do Unusual Items Influence Profit?

Surprisingly, given Actoz SoftLtd's accrual ratio implied strong cash conversion, its paper profit was actually boosted by ₩5.2b in unusual items. 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'. If Actoz SoftLtd doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Actoz SoftLtd's Profit Performance

Actoz SoftLtd's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Based on these factors, we think that Actoz SoftLtd's profits are a reasonably conservative guide to its underlying profitability. If you want to do dive deeper into Actoz SoftLtd, you'd also look into what risks it is currently facing. For instance, we've identified 3 warning signs for Actoz SoftLtd (1 can't be ignored) you should be familiar with.

Our examination of Actoz SoftLtd has focussed on certain factors that can make its earnings look better than they are. 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.