Shinsung ST's (KOSDAQ:416180) Weak Earnings Might Be Worse Than They Appear

Investors were disappointed with Shinsung ST Co., Ltd.'s (KOSDAQ:416180) recent earnings. We looked deeper and believe that there is even more to be worried about, beyond the soft profit numbers.

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A Closer Look At Shinsung ST'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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2025, Shinsung ST had an accrual ratio of 0.47. 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 ₩2.50b, a look at free cash flow indicates it actually burnt through ₩40b in the last year. It's worth noting that Shinsung ST generated positive FCF of ₩2.4b a year ago, so at least they've done it in the past. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

See our latest analysis for Shinsung ST

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

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Shinsung ST's profit was boosted by unusual items worth ₩730m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Shinsung ST doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Shinsung ST's Profit Performance

Summing up, Shinsung ST received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue Shinsung ST's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Shinsung ST at this point in time. Our analysis shows 4 warning signs for Shinsung ST (2 are potentially serious!) and we strongly recommend you look at them before investing.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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.