Impressive Earnings May Not Tell The Whole Story For Korea Information Engineering Services (KOSDAQ:039740)

Despite posting some strong earnings, the market for Korea Information Engineering Services Co., Ltd.'s (KOSDAQ:039740) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

Zooming In On Korea Information Engineering Services' 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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to December 2024, Korea Information Engineering Services had an accrual ratio of -0.11. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of ₩9.5b in the last year, which was a lot more than its statutory profit of ₩3.60b. Korea Information Engineering Services shareholders are no doubt pleased that free cash flow improved over the last twelve months. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

View our latest analysis for Korea Information Engineering Services

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Korea Information Engineering Services.

The Impact Of Unusual Items On Profit

While the accrual ratio might bode well, we also note that Korea Information Engineering Services' profit was boosted by unusual items worth ₩3.6b in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Korea Information Engineering Services' positive unusual items were quite significant relative to its profit in the year to December 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Korea Information Engineering Services' Profit Performance

Korea Information Engineering Services' profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Based on these factors, we think it's very unlikely that Korea Information Engineering Services' statutory profits make it seem much weaker than it is. If you'd like to know more about Korea Information Engineering Services as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for Korea Information Engineering Services you should be aware of.

Our examination of Korea Information Engineering Services has focussed on certain factors that can make its earnings look better than they are. 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 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.