Fajarbaru Builder Group Bhd's (KLSE:FAJAR) Promising Earnings May Rest On Soft Foundations

Fajarbaru Builder Group Bhd.'s (KLSE:FAJAR) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

See our latest analysis for Fajarbaru Builder Group Bhd

A Closer Look At Fajarbaru Builder Group Bhd'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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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 September 2024, Fajarbaru Builder Group Bhd recorded an accrual ratio of 0.25. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Even though it reported a profit of RM59.6m, a look at free cash flow indicates it actually burnt through RM28m in the last year. We also note that Fajarbaru Builder Group Bhd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of RM28m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Fajarbaru Builder Group Bhd.

Our Take On Fajarbaru Builder Group Bhd's Profit Performance

Fajarbaru Builder Group Bhd didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Fajarbaru Builder Group Bhd's true underlying earnings power is actually less than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Fajarbaru Builder Group Bhd as a business, it's important to be aware of any risks it's facing. When we did our research, we found 4 warning signs for Fajarbaru Builder Group Bhd (2 can't be ignored!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of Fajarbaru Builder Group Bhd'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.