INNOX Advanced MaterialsLtd's (KOSDAQ:272290) Promising Earnings May Rest On Soft Foundations

Despite announcing strong earnings, INNOX Advanced Materials Co.,Ltd.'s (KOSDAQ:272290) stock was sluggish. Our analysis uncovered some concerning factors that we believe the market might be paying attention to.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

A Closer Look At INNOX Advanced MaterialsLtd'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

INNOX Advanced MaterialsLtd has an accrual ratio of 0.54 for the year to September 2025. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of ₩79.1b, a look at free cash flow indicates it actually burnt through ₩230b in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₩230b, this year, indicates high risk.

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 INNOX Advanced MaterialsLtd's Profit Performance

As we have made quite clear, we're a bit worried that INNOX Advanced MaterialsLtd didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that INNOX Advanced MaterialsLtd's underlying earnings power is lower than its statutory profit. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over the last year. 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. If you want to do dive deeper into INNOX Advanced MaterialsLtd, you'd also look into what risks it is currently facing. To that end, you should learn about the 2 warning signs we've spotted with INNOX Advanced MaterialsLtd (including 1 which is a bit concerning).

This note has only looked at a single factor that sheds light on the nature of INNOX Advanced MaterialsLtd's profit. 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.