Ajinomoto (Malaysia) Berhad's (KLSE:AJI) Promising Earnings May Rest On Soft Foundations

Despite posting some strong earnings, the market for Ajinomoto (Malaysia) Berhad's (KLSE:AJI) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

Check out our latest analysis for Ajinomoto (Malaysia) Berhad

Zooming In On Ajinomoto (Malaysia) Berhad'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to March 2024, Ajinomoto (Malaysia) Berhad had an accrual ratio of 0.66. That means it didn't generate anywhere near enough free cash flow to match its profit. Statistically speaking, that's a real negative for future earnings. In fact, it had free cash flow of RM49m in the last year, which was a lot less than its statutory profit of RM401.4m. Given that Ajinomoto (Malaysia) Berhad had negative free cash flow in the prior corresponding period, the trailing twelve month resul of RM49m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Ajinomoto (Malaysia) Berhad.

Our Take On Ajinomoto (Malaysia) Berhad's Profit Performance

As we have made quite clear, we're a bit worried that Ajinomoto (Malaysia) Berhad didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Ajinomoto (Malaysia) Berhad's underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. If you want to do dive deeper into Ajinomoto (Malaysia) Berhad, you'd also look into what risks it is currently facing. For example - Ajinomoto (Malaysia) Berhad has 1 warning sign we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Ajinomoto (Malaysia) Berhad's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.