Some Investors May Be Willing To Look Past Korea Electric Power Industrial Development's (KRX:130660) Soft Earnings

The market was pleased with the recent earnings report from Korea Electric Power Industrial Development Co., Ltd (KRX:130660), despite the profit numbers being soft. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

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Examining Cashflow Against Korea Electric Power Industrial Development's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Korea Electric Power Industrial Development has an accrual ratio of -0.23 for the year to March 2025. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of ₩27b, well over the ₩11.5b it reported in profit. Korea Electric Power Industrial Development's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

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

As we discussed above, Korea Electric Power Industrial Development's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Korea Electric Power Industrial Development's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at 47% per year over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Korea Electric Power Industrial Development, you'd also look into what risks it is currently facing. Case in point: We've spotted 2 warning signs for Korea Electric Power Industrial Development 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. 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.