A-Rank Berhad's (KLSE:ARANK) Sluggish Earnings Might Be Just The Beginning Of Its Problems

Investors were disappointed by A-Rank Berhad's (KLSE:ARANK ) latest earnings release. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

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Zooming In On A-Rank 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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.

A-Rank Berhad has an accrual ratio of 0.21 for the year to April 2025. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In the last twelve months it actually had negative free cash flow, with an outflow of RM39m despite its profit of RM13.4m, mentioned above. We saw that FCF was RM7.6m a year ago though, so A-Rank Berhad has at least been able to generate positive FCF in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of A-Rank Berhad.

Our Take On A-Rank Berhad's Profit Performance

A-Rank Berhad didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that A-Rank Berhad's true underlying earnings power is actually less than its statutory profit. In further bad news, its earnings per share decreased in 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 want to do dive deeper into A-Rank Berhad, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 5 warning signs for A-Rank Berhad (of which 3 are potentially serious!) you should know about.

This note has only looked at a single factor that sheds light on the nature of A-Rank 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.