We Think That There Are Issues Underlying WITHUS PHARMACEUTICALLTD's (KOSDAQ:330350) Earnings

WITHUS PHARMACEUTICAL Co.,LTD.'s (KOSDAQ:330350) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

See our latest analysis for WITHUS PHARMACEUTICALLTD

A Closer Look At WITHUS PHARMACEUTICALLTD's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to March 2024, WITHUS PHARMACEUTICALLTD recorded an accrual ratio of 0.22. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In the last twelve months it actually had negative free cash flow, with an outflow of ₩11b despite its profit of ₩9.19b, mentioned above. We also note that WITHUS PHARMACEUTICALLTD's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₩11b. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

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

The Impact Of Unusual Items On Profit

The fact that the company had unusual items boosting profit by ₩1.1b, in the last year, probably goes some way to explain why its accrual ratio was so weak. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On WITHUS PHARMACEUTICALLTD's Profit Performance

WITHUS PHARMACEUTICALLTD had a weak accrual ratio, but its profit did receive a boost from unusual items. For the reasons mentioned above, we think that a perfunctory glance at WITHUS PHARMACEUTICALLTD's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into WITHUS PHARMACEUTICALLTD, you'd also look into what risks it is currently facing. For example, we've found that WITHUS PHARMACEUTICALLTD has 3 warning signs (2 are a bit unpleasant!) that deserve your attention before going any further with your analysis.

Our examination of WITHUS PHARMACEUTICALLTD has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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.

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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.