The Strong Earnings Posted By OPASNET (KOSDAQ:173130) Are A Good Indication Of The Strength Of The Business

OPASNET co., Ltd.'s (KOSDAQ:173130) earnings announcement last week was disappointing for investors, despite the decent profit numbers. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

See our latest analysis for OPASNET

A Closer Look At OPASNET'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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 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. 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 December 2023, OPASNET recorded an accrual ratio of -0.38. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of ₩27b in the last year, which was a lot more than its statutory profit of ₩10.5b. Given that OPASNET had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₩27b would seem to be a step in the right direction.

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

Our Take On OPASNET's Profit Performance

Happily for shareholders, OPASNET produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that OPASNET's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example - OPASNET has 2 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of OPASNET's profit. But there are plenty of other ways to inform your opinion of a company. 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 that insiders are buying.

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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.