CBH Engineering Holding Berhad's (KLSE:CBHB) Shareholders May Want To Dig Deeper Than Statutory Profit

CBH Engineering Holding Berhad (KLSE:CBHB) just released a solid earnings report, and the stock displayed some strength. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.

Our free stock report includes 1 warning sign investors should be aware of before investing in CBH Engineering Holding Berhad. Read for free now.

A Closer Look At CBH Engineering Holding 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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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.

CBH Engineering Holding Berhad has an accrual ratio of 0.43 for the year to December 2024. That means it didn't generate anywhere near enough free cash flow to match its profit. Statistically speaking, that's a real negative for future earnings. Indeed, in the last twelve months it reported free cash flow of RM17m, which is significantly less than its profit of RM41.7m. CBH Engineering Holding Berhad shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down over the last twelve months. One positive for CBH Engineering Holding Berhad shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On CBH Engineering Holding Berhad's Profit Performance

As we discussed above, we think CBH Engineering Holding Berhad's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that CBH Engineering Holding Berhad's underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 26% in the last year. 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. So while earnings quality is important, it's equally important to consider the risks facing CBH Engineering Holding Berhad at this point in time. You'd be interested to know, that we found 1 warning sign for CBH Engineering Holding Berhad and you'll want to know about it.

Today we've zoomed in on a single data point to better understand the nature of CBH Engineering Holding Berhad's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.