Steel Hawk Berhad (KLSE:HAWK) Is Posting Healthy Earnings, But It Is Not All Good News

Even though Steel Hawk Berhad (KLSE:HAWK) posted strong earnings recently, the stock hasn't reacted in a large way. We decided to have a deeper look, and we believe that investors might be worried about several concerning factors that we found.

We've discovered 5 warning signs about Steel Hawk Berhad. View them for free.

A Closer Look At Steel Hawk 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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Steel Hawk Berhad has an accrual ratio of 0.74 for the year to December 2024. 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. Even though it reported a profit of RM12.7m, a look at free cash flow indicates it actually burnt through RM22m in the last year. We also note that Steel Hawk Berhad's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of RM22m. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

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

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Steel Hawk Berhad expanded the number of shares on issue by 23% over the last year. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out Steel Hawk Berhad's historical EPS growth by clicking on this link.

A Look At The Impact Of Steel Hawk Berhad's Dilution On Its Earnings Per Share (EPS)

As you can see above, Steel Hawk Berhad has been growing its net income over the last few years, with an annualized gain of 508% over three years. But EPS was only up 467% per year, in the exact same period. And the 75% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 63% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Steel Hawk Berhad can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Steel Hawk Berhad's Profit Performance

As it turns out, Steel Hawk Berhad couldn't match its profit with cashflow and its dilution means that earnings per share growth is lagging net income growth. For the reasons mentioned above, we think that a perfunctory glance at Steel Hawk Berhad's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Steel Hawk Berhad, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 5 warning signs for Steel Hawk Berhad (of which 2 make us uncomfortable!) you should know about.

Our examination of Steel Hawk Berhad has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there are plenty of other ways to inform your opinion of a company. 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 with significant insider holdings 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.