We Think Eversendai Corporation Berhad's (KLSE:SENDAI) Profit Is Only A Baseline For What They Can Achieve

Eversendai Corporation Berhad (KLSE:SENDAI) recently posted some strong earnings, and the market responded positively. We have done some analysis, and we found several positive factors beyond the profit numbers.

See our latest analysis for Eversendai Corporation Berhad

Examining Cashflow Against Eversendai Corporation 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). 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to June 2024, Eversendai Corporation Berhad had an accrual ratio of -0.33. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of RM414m, well over the RM27.1m it reported in profit. Notably, Eversendai Corporation Berhad had negative free cash flow last year, so the RM414m it produced this year was a welcome improvement.

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

Our Take On Eversendai Corporation Berhad's Profit Performance

Happily for shareholders, Eversendai Corporation Berhad produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Eversendai Corporation Berhad's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. 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'd like to know more about Eversendai Corporation Berhad as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Eversendai Corporation Berhad (including 1 which is a bit concerning).

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