D&C MediaLtd's (KOSDAQ:263720) Strong Earnings Are Of Good Quality

The subdued stock price reaction suggests that D&C Media Co.,Ltd.'s (KOSDAQ:263720) strong earnings didn't offer any surprises. Our analysis suggests that investors might be missing some promising details.

Check out our latest analysis for D&C MediaLtd

A Closer Look At D&C MediaLtd'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to March 2024, D&C MediaLtd had an accrual ratio of -0.12. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of ₩9.3b during the period, dwarfing its reported profit of ₩5.27b. D&C MediaLtd's free cash flow improved over the last year, which is generally good to see.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On D&C MediaLtd's Profit Performance

D&C MediaLtd's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think D&C MediaLtd's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 7.7% over the last twelve months. 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 want to do dive deeper into D&C MediaLtd, you'd also look into what risks it is currently facing. Our analysis shows 2 warning signs for D&C MediaLtd (1 is potentially serious!) and we strongly recommend you look at these bad boys before investing.

This note has only looked at a single factor that sheds light on the nature of D&C MediaLtd'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. 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.