Computer Forms (Malaysia) Berhad's (KLSE:CFM) Shareholders May Want To Dig Deeper Than Statutory Profit

Computer Forms (Malaysia) Berhad's (KLSE:CFM) robust recent earnings didn't do much to move the stock. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

View our latest analysis for Computer Forms (Malaysia) Berhad

A Closer Look At Computer Forms (Malaysia) 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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2021, Computer Forms (Malaysia) Berhad had an accrual ratio of 2.04. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of RM62.0m, a look at free cash flow indicates it actually burnt through RM4.7m in the last year. We saw that FCF was RM159k a year ago though, so Computer Forms (Malaysia) Berhad has at least been able to generate positive FCF in the past. One positive for Computer Forms (Malaysia) 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. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Computer Forms (Malaysia) Berhad.

Our Take On Computer Forms (Malaysia) Berhad's Profit Performance

As we have made quite clear, we're a bit worried that Computer Forms (Malaysia) Berhad didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Computer Forms (Malaysia) Berhad's underlying earnings power is lower than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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 Computer Forms (Malaysia) Berhad as a business, it's important to be aware of any risks it's facing. For example, Computer Forms (Malaysia) Berhad has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of Computer Forms (Malaysia) 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. 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 that insiders are buying 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.