Investors Can Find Comfort In Korea Electric Power Industrial Development's (KRX:130660) Earnings Quality

The market for Korea Electric Power Industrial Development Co., Ltd's (KRX:130660) shares didn't move much after it posted weak earnings recently. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

Check out our latest analysis for Korea Electric Power Industrial Development

Zooming In On Korea Electric Power Industrial Development's 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. 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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Korea Electric Power Industrial Development has an accrual ratio of -0.20 for the year to September 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of ₩29b in the last year, which was a lot more than its statutory profit of ₩13.6b. Korea Electric Power Industrial Development's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Korea Electric Power Industrial Development.

Our Take On Korea Electric Power Industrial Development's Profit Performance

Happily for shareholders, Korea Electric Power Industrial Development produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Korea Electric Power Industrial Development's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. 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 Korea Electric Power Industrial Development, you'd also look into what risks it is currently facing. For example - Korea Electric Power Industrial Development has 1 warning sign we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Korea Electric Power Industrial Development's profit. But there are plenty of other ways to inform your opinion of a company. 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.