We Think That There Are More Issues For Southern Cable Group Berhad (KLSE:SCGBHD) Than Just Sluggish Earnings

Southern Cable Group Berhad's (KLSE:SCGBHD) recent weak earnings report didn't cause a big stock movement. We think that investors are worried about some weaknesses underlying the earnings.

See our latest analysis for Southern Cable Group Berhad

Zooming In On Southern Cable Group Berhad's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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 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 December 2021, Southern Cable Group Berhad recorded an accrual ratio of 0.38. 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 RM121m, in contrast to the aforementioned profit of RM10.9m. It's worth noting that Southern Cable Group Berhad generated positive FCF of RM40m a year ago, so at least they've done it in the past. One positive for Southern Cable Group 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 Southern Cable Group Berhad.

Our Take On Southern Cable Group Berhad's Profit Performance

As we have made quite clear, we're a bit worried that Southern Cable Group Berhad didn't back up the last year's profit with free cashflow. For this reason, we think that Southern Cable 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. In further bad news, its earnings per share decreased in the last year. 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 Southern Cable Group Berhad as a business, it's important to be aware of any risks it's facing. For example, Southern Cable Group Berhad has 5 warning signs (and 3 which shouldn't be ignored) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of Southern Cable Group 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 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.