Ubiquoss' (KOSDAQ:264450) Earnings May Just Be The Starting Point

Investors were underwhelmed by the solid earnings posted by Ubiquoss Inc. (KOSDAQ:264450) recently. We did some digging and actually think they are being unnecessarily pessimistic.

Check out our latest analysis for Ubiquoss

Zooming In On Ubiquoss' 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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Ubiquoss has an accrual ratio of -0.15 for the year to March 2024. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of ₩36b during the period, dwarfing its reported profit of ₩27.3b. Given that Ubiquoss had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₩36b 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 Ubiquoss.

Our Take On Ubiquoss' Profit Performance

Ubiquoss' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Ubiquoss' earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 18% over the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. In terms of investment risks, we've identified 1 warning sign with Ubiquoss, and understanding this should be part of your investment process.

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