Here's Why Lee Swee Kiat Group Berhad's (KLSE:LEESK) Statutory Earnings Are Arguably Too Conservative

Broadly speaking, profitable businesses are less risky than unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. This article will consider whether Lee Swee Kiat Group Berhad's (KLSE:LEESK) statutory profits are a good guide to its underlying earnings.

While Lee Swee Kiat Group Berhad was able to generate revenue of RM95.4m in the last twelve months, we think its profit result of RM8.11m was more important. In the chart below, you can see that its profit and revenue have both grown over the last three years, albeit not in the last year.

Check out our latest analysis for Lee Swee Kiat Group Berhad

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. So today we'll look at what Lee Swee Kiat Group Berhad's cashflow tells us about the quality of its earnings. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Examining Cashflow Against Lee Swee Kiat Group 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. 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.

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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2020, Lee Swee Kiat Group Berhad had an accrual ratio of -0.29. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of RM21m during the period, dwarfing its reported profit of RM8.11m. Given that Lee Swee Kiat Group Berhad had negative free cash flow in the prior corresponding period, the trailing twelve month resul of RM21m would seem to be a step in the right direction.

Our Take On Lee Swee Kiat Group Berhad's Profit Performance

Happily for shareholders, Lee Swee Kiat Group Berhad produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Lee Swee Kiat Group Berhad's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 63% per year 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, we've discovered 3 warning signs that you should run your eye over to get a better picture of Lee Swee Kiat Group Berhad.

Today we've zoomed in on a single data point to better understand the nature of Lee Swee Kiat Group Berhad's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.
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