Impressive Earnings May Not Tell The Whole Story For Nextgreen Global Berhad (KLSE:NGGB)

Nextgreen Global Berhad's (KLSE:NGGB) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

View our latest analysis for Nextgreen Global Berhad

Examining Cashflow Against Nextgreen Global Berhad's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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.

Nextgreen Global Berhad has an accrual ratio of 0.21 for the year to September 2024. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Over the last year it actually had negative free cash flow of RM61m, in contrast to the aforementioned profit of RM27.1m. We also note that Nextgreen Global Berhad's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of RM61m. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

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

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Nextgreen Global Berhad increased the number of shares on issue by 14% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Nextgreen Global Berhad's EPS by clicking here.

A Look At The Impact Of Nextgreen Global Berhad's Dilution On Its Earnings Per Share (EPS)

Three years ago, Nextgreen Global Berhad lost money. The good news is that profit was up 84% in the last twelve months. On the other hand, earnings per share are only up 50% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Nextgreen Global Berhad can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Nextgreen Global Berhad's Profit Performance

As it turns out, Nextgreen Global Berhad couldn't match its profit with cashflow and its dilution means that earnings per share growth is lagging net income growth. Considering all this we'd argue Nextgreen Global Berhad's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Nextgreen Global Berhad as a business, it's important to be aware of any risks it's facing. When we did our research, we found 2 warning signs for Nextgreen Global Berhad (1 shouldn't be ignored!) that we believe deserve your full attention.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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 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.