We Think That There Are More Issues For Muar Ban Lee Group Berhad (KLSE:MBL) Than Just Sluggish Earnings

The market rallied behind Muar Ban Lee Group Berhad's (KLSE:MBL) stock, leading do a rise in the share price after its recent weak earnings report. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Muar Ban Lee Group Berhad.

View our latest analysis for Muar Ban Lee Group Berhad

Examining Cashflow Against Muar Ban Lee Group 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. 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".

Muar Ban Lee Group Berhad has an accrual ratio of 0.34 for the year to September 2024. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Even though it reported a profit of RM44.5m, a look at free cash flow indicates it actually burnt through RM20m in the last year. We saw that FCF was RM11m a year ago though, so Muar Ban Lee Group Berhad has at least been able to generate positive FCF in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Muar Ban Lee Group Berhad.

Our Take On Muar Ban Lee Group Berhad's Profit Performance

As we discussed above, we think Muar Ban Lee Group Berhad's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Muar Ban Lee Group Berhad's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Muar Ban Lee Group Berhad as a business, it's important to be aware of any risks it's facing. For instance, we've identified 2 warning signs for Muar Ban Lee Group Berhad (1 is significant) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Muar Ban Lee Group 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. 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.