Investors Can Find Comfort In Innocean Worldwide's (KRX:214320) Earnings Quality

Shareholders appeared unconcerned with Innocean Worldwide Inc.'s (KRX:214320) lackluster earnings report last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

We've discovered 1 warning sign about Innocean Worldwide. View them for free.

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

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to March 2025, Innocean Worldwide recorded an accrual ratio of -0.12. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of ₩146b in the last year, which was a lot more than its statutory profit of ₩86.6b. Notably, Innocean Worldwide had negative free cash flow last year, so the ₩146b it produced this year was a welcome improvement.

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 Innocean Worldwide's Profit Performance

As we discussed above, Innocean Worldwide has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Innocean Worldwide's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 28% per year over the last three years. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example - Innocean Worldwide has 1 warning sign we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Innocean Worldwide's profit. But there are plenty of other ways to inform your opinion of a company. 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. 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.