We Think That There Are Issues Underlying Fima Corporation Berhad's (KLSE:FIMACOR) Earnings

Despite posting some strong earnings, the market for Fima Corporation Berhad's (KLSE:FIMACOR) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

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Examining Cashflow Against Fima Corporation 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Fima Corporation Berhad has an accrual ratio of 0.26 for the year to March 2025. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of RM31.8m, a look at free cash flow indicates it actually burnt through RM85m in the last year. It's worth noting that Fima Corporation Berhad generated positive FCF of RM35m a year ago, so at least they've done it in the past. One positive for Fima Corporation 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 Fima Corporation Berhad.

Our Take On Fima Corporation Berhad's Profit Performance

Fima Corporation Berhad didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Fima Corporation Berhad's statutory profits are better than its underlying earnings power. The good news is that, its earnings per share increased by 60% in the 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 Fima Corporation Berhad at this point in time. Every company has risks, and we've spotted 3 warning signs for Fima Corporation Berhad (of which 2 shouldn't be ignored!) you should know about.

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