Shareholders Can Be Confident That Golden Pharos Berhad's (KLSE:GPHAROS) Earnings Are High Quality

Investors were underwhelmed by the solid earnings posted by Golden Pharos Berhad (KLSE:GPHAROS) recently. We did some digging and actually think they are being unnecessarily pessimistic.

Check out our latest analysis for Golden Pharos Berhad

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

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to June 2024, Golden Pharos Berhad recorded an accrual ratio of -0.15. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of RM28m in the last year, which was a lot more than its statutory profit of RM16.9m. Golden Pharos Berhad's free cash flow improved over the last year, which is generally good to see.

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

Our Take On Golden Pharos Berhad's Profit Performance

Golden Pharos Berhad's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Golden Pharos Berhad's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 45% over the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Golden Pharos Berhad as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 2 warning signs for Golden Pharos Berhad and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Golden Pharos 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.