Should You Use CSC Steel Holdings Berhad's (KLSE:CSCSTEL) Statutory Earnings To Analyse It?

As a general rule, we think profitable companies are less risky than companies that lose money. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether CSC Steel Holdings Berhad's (KLSE:CSCSTEL) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months CSC Steel Holdings Berhad made a profit of RM22.6m on revenue of RM1.05b. Below, you can see that both its revenue and its profit have fallen over the last three years.

Check out our latest analysis for CSC Steel Holdings Berhad

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. As a result, we think it's well worth considering what CSC Steel Holdings Berhad's cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Examining Cashflow Against CSC Steel Holdings 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2020, CSC Steel Holdings Berhad had an accrual ratio of -0.14. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of RM99m in the last year, which was a lot more than its statutory profit of RM22.6m. CSC Steel Holdings Berhad shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On CSC Steel Holdings Berhad's Profit Performance

As we discussed above, CSC Steel Holdings Berhad has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that CSC Steel Holdings 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 2 warning signs for CSC Steel Holdings Berhad you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of CSC Steel Holdings Berhad's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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