Impressive Earnings May Not Tell The Whole Story For Fibromat (M) Berhad (KLSE:FIBRO)

Despite announcing strong earnings, Fibromat (M) Berhad's (KLSE:FIBRO) stock was sluggish. We did some digging and found some worrying underlying problems.

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A Closer Look At Fibromat (M) Berhad'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'.

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. 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.

Fibromat (M) Berhad has an accrual ratio of 0.22 for the year to June 2025. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of RM12.1m, a look at free cash flow indicates it actually burnt through RM1.6m in the last year. We saw that FCF was RM8.7m a year ago though, so Fibromat (M) Berhad has at least been able to generate positive FCF in the past. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings. The good news for shareholders is that Fibromat (M) Berhad's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. 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.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Fibromat (M) Berhad increased the number of shares on issue by 15% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Fibromat (M) Berhad's EPS by clicking here.

How Is Dilution Impacting Fibromat (M) Berhad's Earnings Per Share (EPS)?

As you can see above, Fibromat (M) Berhad has been growing its net income over the last few years, with an annualized gain of 209% over three years. And the 50% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 47% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Fibromat (M) Berhad can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On Fibromat (M) Berhad's Profit Performance

As it turns out, Fibromat (M) Berhad couldn't match its profit with cashflow and its dilution means that earnings per share growth is lagging net income growth. For the reasons mentioned above, we think that a perfunctory glance at Fibromat (M) Berhad's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Fibromat (M) Berhad, you'd also look into what risks it is currently facing. To help with this, we've discovered 3 warning signs (1 can't be ignored!) that you ought to be aware of before buying any shares in Fibromat (M) Berhad.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there are plenty of other ways to inform your opinion of a company. 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.

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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.