Shareholders Will Be Pleased With The Quality of Gagasan Nadi Cergas Berhad's (KLSE:NADIBHD) Earnings

Gagasan Nadi Cergas Berhad's (KLSE:NADIBHD) earnings announcement last week was disappointing for investors, despite the decent profit numbers. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

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Zooming In On Gagasan Nadi Cergas 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.

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

Gagasan Nadi Cergas Berhad has an accrual ratio of -0.19 for the year to September 2025. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of RM117m, well over the RM19.2m it reported in profit. Gagasan Nadi Cergas Berhad's free cash flow improved over the last year, which is generally good to see.

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

Our Take On Gagasan Nadi Cergas Berhad's Profit Performance

Happily for shareholders, Gagasan Nadi Cergas Berhad produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Gagasan Nadi Cergas Berhad's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over the last year. 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 Gagasan Nadi Cergas Berhad as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for Gagasan Nadi Cergas Berhad you should be mindful of and 1 of them shouldn't be ignored.

Today we've zoomed in on a single data point to better understand the nature of Gagasan Nadi Cergas 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. 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.