KKB Engineering Berhad's (KLSE:KKB) Shareholders Have More To Worry About Than Only Soft Earnings

The market wasn't impressed with the soft earnings from KKB Engineering Berhad (KLSE:KKB) recently. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

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Examining Cashflow Against KKB Engineering 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. The ratio shows us how much a company's profit exceeds its FCF.

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 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to March 2025, KKB Engineering Berhad recorded an accrual ratio of 0.41. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of RM21.1m, a look at free cash flow indicates it actually burnt through RM68m in the last year. It's worth noting that KKB Engineering Berhad generated positive FCF of RM93m a year ago, so at least they've done it in the past. One positive for KKB Engineering 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. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

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

Our Take On KKB Engineering Berhad's Profit Performance

As we discussed above, we think KKB Engineering 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 KKB Engineering Berhad's underlying earnings power is lower than its statutory profit. Sadly, its EPS was down over the last twelve months. 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 want to do dive deeper into KKB Engineering Berhad, you'd also look into what risks it is currently facing. To help with this, we've discovered 4 warning signs (3 are significant!) that you ought to be aware of before buying any shares in KKB Engineering Berhad.

This note has only looked at a single factor that sheds light on the nature of KKB Engineering 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. 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.