There May Be Reason For Hope In Scicom (MSC) Berhad's (KLSE:SCICOM) Disappointing Earnings

The market was pleased with the recent earnings report from Scicom (MSC) Berhad (KLSE:SCICOM), despite the profit numbers being soft. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

A Closer Look At Scicom (MSC) 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2025, Scicom (MSC) Berhad had an accrual ratio of -0.26. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of RM41m, well over the RM24.8m it reported in profit. 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

As we discussed above, Scicom (MSC) Berhad's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Scicom (MSC) Berhad's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 3 warning signs for Scicom (MSC) Berhad (of which 1 is a bit concerning!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Scicom (MSC) Berhad's profit. But there are plenty of other ways to inform your opinion of a company. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.