We Don’t Think Samaiden Group Berhad's (KLSE:SAMAIDEN) Earnings Should Make Shareholders Too Comfortable

Shareholders didn't seem to be thrilled with Samaiden Group Berhad's (KLSE:SAMAIDEN) recent earnings report, despite healthy profit numbers. Our analysis suggests they may be concerned about some underlying details.

Check out our latest analysis for Samaiden Group Berhad

Zooming In On Samaiden Group Berhad's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Samaiden Group Berhad has an accrual ratio of 1.72 for the year to December 2021. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of RM24m, in contrast to the aforementioned profit of RM7.15m. We also note that Samaiden Group Berhad's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of RM24m. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

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

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Samaiden Group Berhad increased the number of shares on issue by 10% over the last twelve months by issuing new shares. 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 Samaiden Group Berhad's historical EPS growth by clicking on this link.

How Is Dilution Impacting Samaiden Group Berhad's Earnings Per Share? (EPS)

As you can see above, Samaiden Group Berhad has been growing its net income over the last few years, with an annualized gain of 33% over three years. But on the other hand, earnings per share actually fell by 8.8% per year. And over the last 12 months, the company grew its profit by 8.6%. But earnings per share are actually down 17%, over the last twelve months. So you can see that the dilution has had a bit of an impact on shareholders.

If Samaiden Group 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 that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On Samaiden Group Berhad's Profit Performance

As it turns out, Samaiden Group Berhad couldn't match its profit with cashflow and its dilution means that shareholders own less of the company than the did before (unless they bought more shares). Considering all this we'd argue Samaiden Group Berhad's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Samaiden Group Berhad, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for Samaiden Group Berhad (of which 1 shouldn't be ignored!) you should know about.

Our examination of Samaiden Group 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 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 that insiders are buying.

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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.