Concrete Engineering Products Berhad's (KLSE:CEPCO) Earnings Are Built On Soft Foundations

Solid profit numbers didn't seem to be enough to please Concrete Engineering Products Berhad's (KLSE:CEPCO) shareholders. Our analysis suggests they may be concerned about some underlying details.

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A Closer Look At Concrete Engineering Products Berhad's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to August 2025, Concrete Engineering Products Berhad had an accrual ratio of 0.26. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of RM19.5m, a look at free cash flow indicates it actually burnt through RM1.5m in the last year. We also note that Concrete Engineering Products Berhad's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of RM1.5m. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

See our latest analysis for Concrete Engineering Products Berhad

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Concrete Engineering Products Berhad.

How Do Unusual Items Influence Profit?

The fact that the company had unusual items boosting profit by RM11m, in the last year, probably goes some way to explain why its accrual ratio was so weak. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. We can see that Concrete Engineering Products Berhad's positive unusual items were quite significant relative to its profit in the year to August 2025. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Concrete Engineering Products Berhad's Profit Performance

Concrete Engineering Products Berhad had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Concrete Engineering Products Berhad's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Concrete Engineering Products Berhad at this point in time. For instance, we've identified 2 warning signs for Concrete Engineering Products Berhad (1 is potentially serious) you should be familiar with.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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.