There Are Some Holes In Reservoir Link Energy Bhd's (KLSE:RL) Solid Earnings Release

Shareholders didn't seem to be thrilled with Reservoir Link Energy Bhd's (KLSE:RL) recent earnings report, despite healthy profit numbers. Our analysis has found some concerning factors which weaken the profit's foundation.

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Zooming In On Reservoir Link Energy Bhd'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.

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

Over the twelve months to June 2025, Reservoir Link Energy Bhd recorded an accrual ratio of 0.29. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Even though it reported a profit of RM27.5m, a look at free cash flow indicates it actually burnt through RM20m in the last year. We also note that Reservoir Link Energy Bhd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of RM20m. Having said that, there is more to consider. We can look at how unusual items in the profit and loss statement impacted its accrual ratio, as well as explore how dilution is impacting shareholders negatively.

View our latest analysis for Reservoir Link Energy Bhd

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Reservoir Link Energy Bhd.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Reservoir Link Energy Bhd increased the number of shares on issue by 7.5% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Reservoir Link Energy Bhd's EPS by clicking here.

How Is Dilution Impacting Reservoir Link Energy Bhd's Earnings Per Share (EPS)?

As it happens, we don't know how much the company made or lost three years ago, because we don't have the data. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. What we do know is that while it's great to see a profit over the last twelve months, that profit would have been better, on a per share basis, if the company hadn't needed to issue shares. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, if Reservoir Link Energy Bhd's earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Reservoir Link Energy Bhd's profit was boosted by unusual items worth RM35m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. Reservoir Link Energy Bhd had a rather significant contribution from unusual items relative to its profit to June 2025. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Reservoir Link Energy Bhd's Profit Performance

In conclusion, Reservoir Link Energy Bhd's weak accrual ratio suggested its statutory earnings have been inflated by the unusual items. Meanwhile, the new shares issued mean that shareholders now own less of the company, unless they tipped in more cash themselves. On reflection, the above-mentioned factors give us the strong impression that Reservoir Link Energy Bhd'sunderlying earnings power is not as good as it might seem, based on the statutory profit numbers. If you want to do dive deeper into Reservoir Link Energy Bhd, you'd also look into what risks it is currently facing. Our analysis shows 2 warning signs for Reservoir Link Energy Bhd (1 is a bit concerning!) and we strongly recommend you look at them before investing.

Our examination of Reservoir Link Energy Bhd 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.