Investors Shouldn't Be Too Comfortable With Alam Maritim Resources Berhad's (KLSE:ALAM) Earnings

Alam Maritim Resources Berhad's (KLSE:ALAM) stock was strong after they recently reported robust earnings. However, we think that shareholders may be missing some concerning details in the numbers.

Check out our latest analysis for Alam Maritim Resources Berhad

Examining Cashflow Against Alam Maritim Resources Berhad's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. 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. 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 June 2023, Alam Maritim Resources Berhad recorded an accrual ratio of 2.31. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of RM13m, in contrast to the aforementioned profit of RM16.5m. We also note that Alam Maritim Resources Berhad's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of RM13m. One positive for Alam Maritim Resources Berhad shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

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

Our Take On Alam Maritim Resources Berhad's Profit Performance

As we have made quite clear, we're a bit worried that Alam Maritim Resources Berhad didn't back up the last year's profit with free cashflow. For this reason, we think that Alam Maritim Resources Berhad's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. On the bright side, the company showed enough improvement to book a profit this year, after losing money 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 Alam Maritim Resources Berhad at this point in time. While conducting our analysis, we found that Alam Maritim Resources Berhad has 5 warning signs and it would be unwise to ignore them.

This note has only looked at a single factor that sheds light on the nature of Alam Maritim Resources 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. 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.