Stock Analysis

Statutory Profit Doesn't Reflect How Good SMRT Holdings Berhad's (KLSE:SMRT) Earnings Are

KLSE:SMRT
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When companies post strong earnings, the stock generally performs well, just like SMRT Holdings Berhad's (KLSE:SMRT) stock has recently. Our analysis found some more factors that we think are good for shareholders.

See our latest analysis for SMRT Holdings Berhad

earnings-and-revenue-history
KLSE:SMRT Earnings and Revenue History June 2nd 2022

Examining Cashflow Against SMRT Holdings 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). 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.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to March 2022, SMRT Holdings Berhad recorded an accrual ratio of -0.27. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of RM56m in the last year, which was a lot more than its statutory profit of RM5.53m. SMRT Holdings Berhad's free cash flow improved over the last year, which is generally good to see.

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

Our Take On SMRT Holdings Berhad's Profit Performance

Happily for shareholders, SMRT Holdings Berhad produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that SMRT Holdings Berhad's statutory profit actually understates its earnings potential! And it's also positive that the company showed enough improvement to book a profit this year, after losing money 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. So while earnings quality is important, it's equally important to consider the risks facing SMRT Holdings Berhad at this point in time. While conducting our analysis, we found that SMRT Holdings Berhad has 1 warning sign and it would be unwise to ignore it.

Today we've zoomed in on a single data point to better understand the nature of SMRT 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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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.