STX Green Logis (KRX:465770) Is Posting Solid Earnings, But It Is Not All Good News

Shareholders were pleased with the recent earnings report from STX Green Logis Ltd (KRX:465770). However, we think that investors should be cautious when interpreting the profit numbers.

Zooming In On STX Green Logis' 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. 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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to December 2024, STX Green Logis recorded an accrual ratio of 0.21. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. To wit, it produced free cash flow of ₩7.8b during the period, falling well short of its reported profit of ₩25.6b. Given that STX Green Logis had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₩7.8b would seem to be a step in the right direction. 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 STX Green Logis

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

How Do Unusual Items Influence Profit?

The fact that the company had unusual items boosting profit by ₩3.7b, in the last year, probably goes some way to explain why its accrual ratio was so weak. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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'. STX Green Logis had a rather significant contribution from unusual items relative to its profit 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 STX Green Logis' Profit Performance

Summing up, STX Green Logis received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. For the reasons mentioned above, we think that a perfunctory glance at STX Green Logis' statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into STX Green Logis, you'd also look into what risks it is currently facing. Case in point: We've spotted 6 warning signs for STX Green Logis you should be mindful of and 3 of them are concerning.

Our examination of STX Green Logis has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.