YX Precious Metals Bhd's (KLSE:YXPM) Anemic Earnings Might Be Worse Than You Think

Investors weren't pleased with the recent soft earnings report from YX Precious Metals Bhd (KLSE:YXPM). Our analysis suggests that while the headline numbers were soft, there are some positive factors which shareholders may have missed.

View our latest analysis for YX Precious Metals Bhd

A Closer Look At YX Precious Metals Bhd'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Over the twelve months to December 2024, YX Precious Metals Bhd recorded an accrual ratio of 0.22. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In the last twelve months it actually had negative free cash flow, with an outflow of RM14m despite its profit of RM7.25m, mentioned above. We saw that FCF was RM851k a year ago though, so YX Precious Metals Bhd has at least been able to generate positive FCF in the past. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of YX Precious Metals Bhd.

The Impact Of Unusual Items On Profit

Unfortunately (in the short term) YX Precious Metals Bhd saw its profit reduced by unusual items worth RM1.1m. If this was a non-cash charge, it would have made the accrual ratio better, if cashflow had stayed strong, so it's not great to see in combination with an uninspiring accrual ratio. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If YX Precious Metals Bhd doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On YX Precious Metals Bhd's Profit Performance

In conclusion, YX Precious Metals Bhd's accrual ratio suggests that its statutory earnings are not backed by cash flow, even though unusual items weighed on profit. Based on these factors, it's hard to tell if YX Precious Metals Bhd's profits are a reasonable reflection of its underlying profitability. If you'd like to know more about YX Precious Metals Bhd as a business, it's important to be aware of any risks it's facing. Our analysis shows 3 warning signs for YX Precious Metals Bhd (1 is a bit unpleasant!) and we strongly recommend you look at these before investing.

Our examination of YX Precious Metals Bhd has focussed on certain factors that can make its earnings look better than they are. 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 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.