Daejoo Electronic Materials (KOSDAQ:078600) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Daejoo Electronic Materials Co., Ltd.'s (KOSDAQ:078600) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

See our latest analysis for Daejoo Electronic Materials

Examining Cashflow Against Daejoo Electronic Materials' 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). 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. The ratio shows us how much a company's profit exceeds its FCF.

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. 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 March 2024, Daejoo Electronic Materials had an accrual ratio of 0.41. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of ₩122b, in contrast to the aforementioned profit of ₩7.57b. We also note that Daejoo Electronic Materials' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₩122b.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Daejoo Electronic Materials' Profit Performance

As we have made quite clear, we're a bit worried that Daejoo Electronic Materials didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Daejoo Electronic Materials' 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. 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. If you want to do dive deeper into Daejoo Electronic Materials, you'd also look into what risks it is currently facing. For example - Daejoo Electronic Materials 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 Daejoo Electronic Materials' profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.