Does Berjaya Sports Toto Berhad's (KLSE:BJTOTO) Statutory Profit Adequately Reflect Its Underlying Profit?

As a general rule, we think profitable companies are less risky than companies that lose money. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. This article will consider whether Berjaya Sports Toto Berhad's (KLSE:BJTOTO) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Berjaya Sports Toto Berhad made a profit of RM133.6m on revenue of RM4.54b. The chart below shows that both revenue and profit have declined over the last three years.

Check out our latest analysis for Berjaya Sports Toto 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. Today, we'll discuss Berjaya Sports Toto Berhad's free cashflow relative to its earnings, and consider what that tells us about the company. 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 Berjaya Sports Toto 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Berjaya Sports Toto Berhad has an accrual ratio of -0.11 for the year to September 2020. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of RM308m during the period, dwarfing its reported profit of RM133.6m. Berjaya Sports Toto Berhad's free cash flow improved over the last year, which is generally good to see.

Our Take On Berjaya Sports Toto Berhad's Profit Performance

As we discussed above, Berjaya Sports Toto Berhad has perfectly satisfactory free cash flow relative to profit. Because of this, we think Berjaya Sports Toto Berhad's earnings potential is at least as good as it seems, and maybe even better! Unfortunately, though, its earnings per share actually fell back over the last year. 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. If you'd like to know more about Berjaya Sports Toto Berhad as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 2 warning signs for Berjaya Sports Toto Berhad and you'll want to know about them.

Today we've zoomed in on a single data point to better understand the nature of Berjaya Sports Toto 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. 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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