Why Pelikan International Corporation Berhad's (KLSE:PELIKAN) Earnings Are Better Than They Seem

The market seemed underwhelmed by last week's earnings announcement from Pelikan International Corporation Berhad (KLSE:PELIKAN) despite the healthy numbers. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

Check out our latest analysis for Pelikan International Corporation Berhad

Zooming In On Pelikan International Corporation 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. 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. 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 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Pelikan International Corporation Berhad has an accrual ratio of -0.13 for the year to September 2021. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of RM114m during the period, dwarfing its reported profit of RM10.0m. Given that Pelikan International Corporation Berhad had negative free cash flow in the prior corresponding period, the trailing twelve month resul of RM114m would seem to be a step in the right direction.

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

Our Take On Pelikan International Corporation Berhad's Profit Performance

Pelikan International Corporation Berhad's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Pelikan International Corporation Berhad's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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 Pelikan International Corporation Berhad as a business, it's important to be aware of any risks it's facing. When we did our research, we found 3 warning signs for Pelikan International Corporation Berhad (2 make us uncomfortable!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Pelikan International Corporation 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.