Sunway Construction Group Berhad's (KLSE:SUNCON) Earnings Seem To Be Promising

Investors signalled that they were pleased with Sunway Construction Group Berhad's (KLSE:SUNCON) most recent earnings report. According to our analysis of the report, the strong headline profit numbers are supported by strong earnings fundamentals.

Check out our latest analysis for Sunway Construction Group Berhad

Examining Cashflow Against Sunway Construction Group 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. 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".

For the year to December 2024, Sunway Construction Group Berhad had an accrual ratio of -0.55. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of RM708m during the period, dwarfing its reported profit of RM186.9m. Given that Sunway Construction Group Berhad had negative free cash flow in the prior corresponding period, the trailing twelve month resul of RM708m would seem to be a step in the right direction.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Sunway Construction Group Berhad's Profit Performance

Happily for shareholders, Sunway Construction Group Berhad produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Sunway Construction Group 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 66% per year over the last three years. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example - Sunway Construction Group Berhad has 1 warning sign we think you should be aware of.

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