Some Investors May Be Willing To Look Past GaeaSoft's (KOSDAQ:051160) Soft Earnings

Shareholders appeared unconcerned with GaeaSoft Corp.'s (KOSDAQ:051160) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

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A Closer Look At GaeaSoft's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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'.

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

Over the twelve months to September 2025, GaeaSoft recorded an accrual ratio of -0.33. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of ₩30b in the last year, which was a lot more than its statutory profit of ₩15.6b. GaeaSoft shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On GaeaSoft's Profit Performance

As we discussed above, GaeaSoft's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think GaeaSoft's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 47% annually, 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. So while earnings quality is important, it's equally important to consider the risks facing GaeaSoft at this point in time. In terms of investment risks, we've identified 1 warning sign with GaeaSoft, and understanding this should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of GaeaSoft's profit. 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.