We Think That There Are Some Issues For Dutch Lady Milk Industries Berhad (KLSE:DLADY) Beyond Its Promising Earnings

The recent earnings posted by Dutch Lady Milk Industries Berhad (KLSE:DLADY) were solid, but the stock didn't move as much as we expected. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

Check out our latest analysis for Dutch Lady Milk Industries Berhad

Zooming In On Dutch Lady Milk Industries Berhad's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Dutch Lady Milk Industries Berhad has an accrual ratio of 0.47 for the year to September 2024. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of RM106m despite its profit of RM88.7m, mentioned above. It's worth noting that Dutch Lady Milk Industries Berhad generated positive FCF of RM3.2m a year ago, so at least they've done it in the past.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Dutch Lady Milk Industries Berhad's Profit Performance

As we discussed above, we think Dutch Lady Milk Industries Berhad's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Dutch Lady Milk Industries Berhad's underlying earnings power is lower than its statutory profit. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over the last year. 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'd like to know more about Dutch Lady Milk Industries Berhad as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 1 warning sign for Dutch Lady Milk Industries Berhad you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Dutch Lady Milk Industries 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. 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.