There May Be Reason For Hope In C.I. Holdings Berhad's (KLSE:CIHLDG) Disappointing Earnings

The market for C.I. Holdings Berhad's (KLSE:CIHLDG) shares didn't move much after it posted weak earnings recently. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

View our latest analysis for C.I. Holdings Berhad

A Closer Look At C.I. Holdings 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. 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. 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.

For the year to March 2024, C.I. Holdings Berhad had an accrual ratio of -0.18. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of RM207m in the last year, which was a lot more than its statutory profit of RM77.6m. Given that C.I. Holdings Berhad had negative free cash flow in the prior corresponding period, the trailing twelve month resul of RM207m 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 C.I. Holdings Berhad.

Our Take On C.I. Holdings Berhad's Profit Performance

Happily for shareholders, C.I. Holdings Berhad produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that C.I. Holdings Berhad's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 39% per year over the last three years. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Case in point: We've spotted 1 warning sign for C.I. Holdings Berhad you should be aware of.

This note has only looked at a single factor that sheds light on the nature of C.I. Holdings 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 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.