Additional Considerations Required While Assessing MONITORAPP's (KOSDAQ:434480) Strong Earnings

Investors were disappointed with MONITORAPP Co., Ltd.'s (KOSDAQ:434480) earnings, despite the strong profit numbers. Our analysis uncovered some concerning factors that we believe the market might be paying attention to.

Examining Cashflow Against MONITORAPP'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. 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. 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. 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.

MONITORAPP has an accrual ratio of 1.21 for the year to December 2024. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of ₩2.08b, a look at free cash flow indicates it actually burnt through ₩8.7b in the last year. We saw that FCF was ₩1.6b a year ago though, so MONITORAPP has at least been able to generate positive FCF in the past. One positive for MONITORAPP shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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

Our Take On MONITORAPP's Profit Performance

As we have made quite clear, we're a bit worried that MONITORAPP didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that MONITORAPP's underlying earnings power is lower than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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 MONITORAPP, you'd also look into what risks it is currently facing. To that end, you should learn about the 4 warning signs we've spotted with MONITORAPP (including 3 which make us uncomfortable).

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