99 Speed Mart Retail Holdings Berhad's (KLSE:99SMART) Promising Earnings May Rest On Soft Foundations

Despite posting some strong earnings, the market for 99 Speed Mart Retail Holdings Berhad's (KLSE:99SMART) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for 99 Speed Mart Retail Holdings Berhad

Zooming In On 99 Speed Mart Retail 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. 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 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 December 2024, 99 Speed Mart Retail Holdings Berhad had an accrual ratio of 0.26. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. In fact, it had free cash flow of RM315m in the last year, which was a lot less than its statutory profit of RM490.3m. 99 Speed Mart Retail Holdings Berhad's free cash flow actually declined over the last year, but it may bounce back next year, since free cash flow is often more volatile than accounting profits. The good news for shareholders is that 99 Speed Mart Retail 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. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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 99 Speed Mart Retail Holdings Berhad's Profit Performance

99 Speed Mart Retail Holdings 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 99 Speed Mart Retail Holdings Berhad's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 22% EPS growth in the last year. 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. So while earnings quality is important, it's equally important to consider the risks facing 99 Speed Mart Retail Holdings Berhad at this point in time. At Simply Wall St, we found 1 warning sign for 99 Speed Mart Retail Holdings Berhad and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of 99 Speed Mart Retail Holdings 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.