Is There More To The Story Than BP Plastics Holding Bhd's (KLSE:BPPLAS) Earnings Growth?

As a general rule, we think profitable companies are less risky than companies that lose money. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding BP Plastics Holding Bhd (KLSE:BPPLAS).

It's good to see that over the last twelve months BP Plastics Holding Bhd made a profit of RM29.1m on revenue of RM315.0m. As depicted below, while its revenue may have fallen over the last few years, its profit actually improved.

Check out our latest analysis for BP Plastics Holding Bhd

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. So today we'll look at what BP Plastics Holding Bhd's cashflow tells us about the quality of its earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of BP Plastics Holding Bhd.

A Closer Look At BP Plastics Holding Bhd's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. 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.

Over the twelve months to September 2020, BP Plastics Holding Bhd recorded an accrual ratio of -0.13. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of RM46m during the period, dwarfing its reported profit of RM29.1m. BP Plastics Holding Bhd shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On BP Plastics Holding Bhd's Profit Performance

As we discussed above, BP Plastics Holding Bhd has perfectly satisfactory free cash flow relative to profit. Because of this, we think BP Plastics Holding Bhd's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of BP Plastics Holding Bhd.

Today we've zoomed in on a single data point to better understand the nature of BP Plastics Holding Bhd's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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. 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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