Wang-Zheng Berhad's (KLSE:WANGZNG) Soft Earnings Don't Show The Whole Picture

The market for Wang-Zheng Berhad's (KLSE:WANGZNG) shares didn't move much after it posted weak earnings recently. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

See our latest analysis for Wang-Zheng Berhad

A Closer Look At Wang-Zheng Berhad's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. The ratio shows us how much a company's profit exceeds its FCF.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Wang-Zheng Berhad has an accrual ratio of -0.18 for the year to March 2021. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of RM30m during the period, dwarfing its reported profit of RM7.17m. Wang-Zheng 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 Wang-Zheng Berhad.

Our Take On Wang-Zheng Berhad's Profit Performance

As we discussed above, Wang-Zheng Berhad's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Wang-Zheng Berhad's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Unfortunately, though, its earnings per share actually fell back over the last year. 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. If you want to do dive deeper into Wang-Zheng Berhad, you'd also look into what risks it is currently facing. To that end, you should learn about the 4 warning signs we've spotted with Wang-Zheng Berhad (including 1 which is concerning).

Today we've zoomed in on a single data point to better understand the nature of Wang-Zheng Berhad's profit. But there are plenty of other ways to inform your opinion of a company. 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. 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.

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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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