Shareholders appeared to be happy with Fraser & Neave Holdings Bhd's (KLSE:F&N) solid earnings report last week. This reaction by the market reaction is understandable when looking at headline profits and we have found some further encouraging factors.
Zooming In On Fraser & Neave Holdings Bhd's Earnings
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. 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.
Fraser & Neave Holdings Bhd has an accrual ratio of -0.14 for the year to June 2021. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of RM740m during the period, dwarfing its reported profit of RM422.5m. Fraser & Neave Holdings Bhd's free cash flow improved over the last year, which is generally good to see.
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 Fraser & Neave Holdings Bhd's Profit Performance
As we discussed above, Fraser & Neave Holdings Bhd has perfectly satisfactory free cash flow relative to profit. Because of this, we think Fraser & Neave Holdings Bhd's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 30% annually, over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Fraser & Neave Holdings Bhd as a business, it's important to be aware of any risks it's facing. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Fraser & Neave Holdings Bhd.
This note has only looked at a single factor that sheds light on the nature of Fraser & Neave Holdings Bhd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 that insiders are buying 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.
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