Earnings Troubles May Signal Larger Issues for PCCS Group Berhad (KLSE:PCCS) Shareholders

The market rallied behind PCCS Group Berhad's (KLSE:PCCS) stock, leading do a rise in the share price after its recent weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

See our latest analysis for PCCS Group Berhad

Zooming In On PCCS Group 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). 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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 March 2024, PCCS Group Berhad had an accrual ratio of 0.25. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In the last twelve months it actually had negative free cash flow, with an outflow of RM38m despite its profit of RM6.68m, mentioned above. It's worth noting that PCCS Group Berhad generated positive FCF of RM2.5m a year ago, so at least they've done it in the past.

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

Our Take On PCCS Group Berhad's Profit Performance

PCCS Group Berhad didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that PCCS Group Berhad's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 8.6% per annum growth in EPS for the last three. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example, we've found that PCCS Group Berhad has 4 warning signs (3 are significant!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of PCCS Group 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 with high insider ownership.

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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.