Bukwang Pharmaceutical's (KRX:003000) Solid Earnings Are Supported By Other Strong Factors

Even though Bukwang Pharmaceutical Co., Ltd.'s (KRX:003000) recent earnings release was robust, the market didn't seem to notice. Our analysis suggests that investors might be missing some promising details.

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A Closer Look At Bukwang Pharmaceutical'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 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Bukwang Pharmaceutical has an accrual ratio of -0.11 for the year to June 2025. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of ₩29b during the period, dwarfing its reported profit of ₩8.36b. Bukwang Pharmaceutical's free cash flow improved over the last year, which is generally good to see. However, that's not the end of the story. We must also consider the impact of unusual items on statutory profit (and thus the accrual ratio), as well as note the ramifications of the company issuing new shares.

View our latest analysis for Bukwang Pharmaceutical

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

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Bukwang Pharmaceutical expanded the number of shares on issue by 44% over the last year. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out Bukwang Pharmaceutical's historical EPS growth by clicking on this link.

How Is Dilution Impacting Bukwang Pharmaceutical's Earnings Per Share (EPS)?

Unfortunately, we don't have any visibility into its profits three years back, because we lack the data. And even focusing only on the last twelve months, we don't have a meaningful growth rate because it made a loss a year ago, too. What we do know is that while it's great to see a profit over the last twelve months, that profit would have been better, on a per share basis, if the company hadn't needed to issue shares. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

In the long term, if Bukwang Pharmaceutical's earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

How Do Unusual Items Influence Profit?

Bukwang Pharmaceutical's profit was reduced by unusual items worth ₩1.0b in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Bukwang Pharmaceutical to produce a higher profit next year, all else being equal.

Our Take On Bukwang Pharmaceutical's Profit Performance

Summing up, Bukwang Pharmaceutical's accrual ratio and its unusual items suggest that its statutory earnings were temporarily depressed (and could bounce back), while the dilution is a negative for shareholders. Given the contrasting considerations, we don't have a strong view as to whether Bukwang Pharmaceutical's profits are an apt reflection of its underlying potential for profit. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, we've found that Bukwang Pharmaceutical has 3 warning signs (2 are a bit unpleasant!) that deserve your attention before going any further with your analysis.

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