Shareholders Will Be Pleased With The Quality of TAS Offshore Berhad's (KLSE:TAS) Earnings

TAS Offshore Berhad (KLSE:TAS) just reported healthy earnings but the stock price didn't move much. We think that investors have missed some encouraging factors underlying the profit figures.

Check out our latest analysis for TAS Offshore Berhad

Examining Cashflow Against TAS Offshore 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to November 2021, TAS Offshore Berhad recorded an accrual ratio of -0.21. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of RM25m, well over the RM4.91m it reported in profit. Notably, TAS Offshore Berhad had negative free cash flow last year, so the RM25m 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 TAS Offshore Berhad.

Our Take On TAS Offshore Berhad's Profit Performance

Happily for shareholders, TAS Offshore Berhad produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that TAS Offshore Berhad's statutory profit actually understates its earnings potential! And it's also positive that the company showed enough improvement to book a profit this year, after losing money 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. So while earnings quality is important, it's equally important to consider the risks facing TAS Offshore Berhad at this point in time. Case in point: We've spotted 2 warning signs for TAS Offshore Berhad you should be aware of.

This note has only looked at a single factor that sheds light on the nature of TAS Offshore Berhad's profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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.