We Think That There Are More Issues For Ingenieur Gudang Berhad (KLSE:INGENIEU) Than Just Sluggish Earnings

The market shrugged off Ingenieur Gudang Berhad's (KLSE:INGENIEU) weak earnings report. Despite the market responding positively, we think that there are several concerning factors that investors should be aware of.

See our latest analysis for Ingenieur Gudang Berhad

A Closer Look At Ingenieur Gudang Berhad's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. 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. 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. 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 May 2024, Ingenieur Gudang Berhad recorded an accrual ratio of 0.31. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Even though it reported a profit of RM21.2m, a look at free cash flow indicates it actually burnt through RM33m in the last year. It's worth noting that Ingenieur Gudang Berhad generated positive FCF of RM23m a year ago, so at least they've done it in the past. However, that's not the end of the story. We can look at how unusual items in the profit and loss statement impacted its accrual ratio, as well as explore how dilution is impacting shareholders negatively.

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

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Ingenieur Gudang Berhad expanded the number of shares on issue by 9.6% over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out Ingenieur Gudang Berhad's historical EPS growth by clicking on this link.

A Look At The Impact Of Ingenieur Gudang Berhad's Dilution On Its Earnings Per Share (EPS)

Three years ago, Ingenieur Gudang Berhad lost money. Even looking at the last year, profit was still down 15%. Sadly, earnings per share fell further, down a full 41% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Ingenieur Gudang Berhad's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Ingenieur Gudang Berhad's profit was boosted by unusual items worth RM20m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. We can see that Ingenieur Gudang Berhad's positive unusual items were quite significant relative to its profit in the year to May 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Ingenieur Gudang Berhad's Profit Performance

Ingenieur Gudang Berhad didn't back up its earnings with free cashflow, but this isn't too surprising given profits were inflated by unusual items. The dilution means the results are weaker when viewed from a per-share perspective. For all the reasons mentioned above, we think that, at a glance, Ingenieur Gudang Berhad's statutory profits could be considered to be low quality, because they are likely to give investors an overly positive impression of the company. 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. For instance, we've identified 4 warning signs for Ingenieur Gudang Berhad (2 are a bit unpleasant) you should be familiar with.

Our examination of Ingenieur Gudang Berhad has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.

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