Shareholders Can Be Confident That MKH Oil Palm (East Kalimantan) Berhad's (KLSE:MKHOP) Earnings Are High Quality

MKH Oil Palm (East Kalimantan) Berhad (KLSE:MKHOP) just reported healthy earnings but the stock price didn't move much. We think that investors have missed some encouraging factors underlying the profit figures.

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Zooming In On MKH Oil Palm (East Kalimantan) Berhad'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. The ratio shows us how much a company's profit exceeds its FCF.

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.

MKH Oil Palm (East Kalimantan) Berhad has an accrual ratio of -0.14 for the year to June 2025. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of RM137m during the period, dwarfing its reported profit of RM89.9m. MKH Oil Palm (East Kalimantan) Berhad 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 MKH Oil Palm (East Kalimantan) Berhad.

Our Take On MKH Oil Palm (East Kalimantan) Berhad's Profit Performance

As we discussed above, MKH Oil Palm (East Kalimantan) Berhad has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that MKH Oil Palm (East Kalimantan) Berhad's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. While earnings are important, another area to consider is the balance sheet. We've done some analysis and you can see our take on MKH Oil Palm (East Kalimantan) Berhad's balance sheet by clicking here.

Today we've zoomed in on a single data point to better understand the nature of MKH Oil Palm (East Kalimantan) 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.