Hong Leong Industries Berhad's (KLSE:HLIND) Solid Earnings Have Been Accounted For Conservatively

Investors signalled that they were pleased with Hong Leong Industries Berhad's (KLSE:HLIND) most recent earnings report. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

Check out our latest analysis for Hong Leong Industries Berhad

Examining Cashflow Against Hong Leong Industries 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to June 2024, Hong Leong Industries Berhad recorded an accrual ratio of -0.38. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of RM628m during the period, dwarfing its reported profit of RM387.9m. Hong Leong Industries Berhad shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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 Hong Leong Industries Berhad's Profit Performance

Happily for shareholders, Hong Leong Industries Berhad produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Hong Leong Industries Berhad's statutory profit actually understates its earnings potential! And the EPS is up 37% annually, over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Hong Leong Industries Berhad as a business, it's important to be aware of any risks it's facing. When we did our research, we found 2 warning signs for Hong Leong Industries Berhad (1 is concerning!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of Hong Leong Industries Berhad'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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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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.