HPP Holdings Berhad's (KLSE:HPPHB) Shareholders May Want To Dig Deeper Than Statutory Profit

The recent earnings posted by HPP Holdings Berhad (KLSE:HPPHB) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

View our latest analysis for HPP Holdings Berhad

Examining Cashflow Against HPP Holdings Berhad'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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. 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. 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.

For the year to August 2021, HPP Holdings Berhad had an accrual ratio of 0.33. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Over the last year it actually had negative free cash flow of RM1.9m, in contrast to the aforementioned profit of RM15.0m. As it happens we don't have the data on what HPP Holdings Berhad produced by way of free cashflow, the year before, which is a pity.

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

Our Take On HPP Holdings Berhad's Profit Performance

As we discussed above, we think HPP Holdings Berhad's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that HPP Holdings Berhad's underlying earnings power is lower than its statutory profit. 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 want to do dive deeper into HPP Holdings Berhad, you'd also look into what risks it is currently facing. To help with this, we've discovered 4 warning signs (1 doesn't sit too well with us!) that you ought to be aware of before buying any shares in HPP Holdings Berhad.

Today we've zoomed in on a single data point to better understand the nature of HPP Holdings Berhad'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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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.

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