Impressive Earnings May Not Tell The Whole Story For Benalec Holdings Berhad (KLSE:BENALEC)

Unsurprisingly, Benalec Holdings Berhad's (KLSE:BENALEC) stock price was strong on the back of its healthy earnings report. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.

Our free stock report includes 2 warning signs investors should be aware of before investing in Benalec Holdings Berhad. Read for free now.

A Closer Look At Benalec Holdings Berhad's 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). 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 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.

Over the twelve months to December 2024, Benalec Holdings Berhad recorded an accrual ratio of -0.11. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. To wit, it produced free cash flow of RM54m during the period, dwarfing its reported profit of RM12.7m. Notably, Benalec Holdings Berhad had negative free cash flow last year, so the RM54m it produced this year was a welcome improvement. 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 Benalec Holdings Berhad

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Benalec Holdings Berhad.

The Impact Of Unusual Items On Profit

While the accrual ratio might bode well, we also note that Benalec Holdings Berhad's profit was boosted by unusual items worth RM2.5m 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 crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. If Benalec Holdings Berhad 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 Benalec Holdings Berhad's Profit Performance

Benalec Holdings Berhad's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Having considered these factors, we don't think Benalec Holdings Berhad's statutory profits give an overly harsh view of the business. 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 2 warning signs with Benalec Holdings Berhad, and understanding these should be part of your investment process.

Our examination of Benalec Holdings Berhad has focussed on certain factors that can make its earnings look better than they are. 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.