Scicom (MSC) Berhad's (KLSE:SCICOM) Soft Earnings Don't Show The Whole Picture

Shareholders appeared unconcerned with Scicom (MSC) Berhad's (KLSE:SCICOM) lackluster earnings report last week. We did some digging, and we believe the earnings are stronger than they seem.

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Zooming In On Scicom (MSC) Berhad's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. 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.

For the year to March 2025, Scicom (MSC) Berhad had an accrual ratio of -0.25. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of RM39m in the last year, which was a lot more than its statutory profit of RM19.8m. Scicom (MSC) Berhad shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On Scicom (MSC) Berhad's Profit Performance

Happily for shareholders, Scicom (MSC) Berhad produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Scicom (MSC) Berhad's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into Scicom (MSC) Berhad, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 2 warning signs for Scicom (MSC) Berhad and you'll want to know about these.

Today we've zoomed in on a single data point to better understand the nature of Scicom (MSC) 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.