Additional Considerations Required While Assessing JiransecurityLtd's (KOSDAQ:208350) Strong Earnings

Despite posting some strong earnings, the market for Jiransecurity Co.,Ltd's (KOSDAQ:208350) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for JiransecurityLtd

Examining Cashflow Against JiransecurityLtd'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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

JiransecurityLtd has an accrual ratio of 0.40 for the year to December 2023. 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 ₩14.5b, a look at free cash flow indicates it actually burnt through ₩7.4b in the last year. We also note that JiransecurityLtd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₩7.4b.

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

Our Take On JiransecurityLtd's Profit Performance

As we discussed above, we think JiransecurityLtd's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that JiransecurityLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Be aware that JiransecurityLtd is showing 2 warning signs in our investment analysis and 1 of those is concerning...

Today we've zoomed in on a single data point to better understand the nature of JiransecurityLtd'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. 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 that insiders are buying 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.