MHC Plantations Bhd's (KLSE:MHC) Strong Earnings Are Of Good Quality

MHC Plantations Bhd (KLSE:MHC) recently posted some strong earnings, and the market responded positively. Our analysis found some more factors that we think are good for shareholders.

See our latest analysis for MHC Plantations Bhd

A Closer Look At MHC Plantations Bhd'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. 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.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

MHC Plantations Bhd has an accrual ratio of -0.11 for the year to December 2021. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of RM105m in the last year, which was a lot more than its statutory profit of RM42.0m. MHC Plantations Bhd shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On MHC Plantations Bhd's Profit Performance

As we discussed above, MHC Plantations Bhd has perfectly satisfactory free cash flow relative to profit. Because of this, we think MHC Plantations Bhd's earnings potential is at least as good as it seems, and maybe even better! Better yet, its EPS are growing strongly, which is nice to see. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example - MHC Plantations Bhd has 2 warning signs we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of MHC Plantations Bhd'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 that insiders are buying.

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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.