We Think You Can Look Beyond KL-Net's (KOSDAQ:039420) Lackluster Earnings

Soft earnings didn't appear to concern KL-Net Corp.'s (KOSDAQ:039420) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

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Zooming In On KL-Net'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. 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.

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

KL-Net has an accrual ratio of -0.10 for the year to June 2025. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of ₩11b during the period, dwarfing its reported profit of ₩8.46b. KL-Net's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of KL-Net.

Our Take On KL-Net's Profit Performance

KL-Net's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think KL-Net's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at 21% per year over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 1 warning sign for KL-Net you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of KL-Net'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.