TCS Group Holdings Berhad's (KLSE:TCS) Problems Go Beyond Weak Profit

TCS Group Holdings Berhad's (KLSE:TCS) stock rose after its recent weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

View our latest analysis for TCS Group Holdings Berhad

A Closer Look At TCS Group Holdings Berhad's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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 June 2021, TCS Group Holdings Berhad had an accrual ratio of 0.36. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of RM1.2m despite its profit of RM15.2m, mentioned above. We saw that FCF was RM20m a year ago though, so TCS Group Holdings Berhad has at least been able to generate positive FCF in the past. The good news for shareholders is that TCS Group Holdings Berhad's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

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.

Our Take On TCS Group Holdings Berhad's Profit Performance

As we have made quite clear, we're a bit worried that TCS Group Holdings Berhad didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that TCS Group Holdings Berhad's underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. If you'd like to know more about TCS Group Holdings Berhad as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 4 warning signs we've spotted with TCS Group Holdings Berhad (including 1 which shouldn't be ignored).

Today we've zoomed in on a single data point to better understand the nature of TCS Group Holdings 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. 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.
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