We Think That There Are Some Issues For Petron Malaysia Refining & Marketing Bhd (KLSE:PETRONM) Beyond Its Promising Earnings

Petron Malaysia Refining & Marketing Bhd's (KLSE:PETRONM) robust recent earnings didn't do much to move the stock. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

Check out our latest analysis for Petron Malaysia Refining & Marketing Bhd

Zooming In On Petron Malaysia Refining & Marketing Bhd's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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. 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. 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 June 2021, Petron Malaysia Refining & Marketing Bhd had an accrual ratio of 0.25. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In the last twelve months it actually had negative free cash flow, with an outflow of RM252m despite its profit of RM284.7m, mentioned above. We also note that Petron Malaysia Refining & Marketing Bhd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of RM252m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Petron Malaysia Refining & Marketing Bhd.

Our Take On Petron Malaysia Refining & Marketing Bhd's Profit Performance

Petron Malaysia Refining & Marketing Bhd 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 Petron Malaysia Refining & Marketing Bhd's true underlying earnings power is actually less than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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 want to do dive deeper into Petron Malaysia Refining & Marketing Bhd, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for Petron Malaysia Refining & Marketing Bhd (of which 2 don't sit too well with us!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Petron Malaysia Refining & Marketing Bhd's profit. 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. 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. 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.
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