As a general rule, we think profitable companies are less risky than companies that lose money. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. This article will consider whether Astro Malaysia Holdings Berhad's (KLSE:ASTRO) statutory profits are a good guide to its underlying earnings.
While Astro Malaysia Holdings Berhad was able to generate revenue of RM4.48b in the last twelve months, we think its profit result of RM510.9m was more important. In the last few years both its revenue and its profit have fallen, as you can see in the chart below.
Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. As a result, we think it's well worth considering what Astro Malaysia 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.
Zooming In On Astro Malaysia Holdings 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'.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.
Over the twelve months to October 2020, Astro Malaysia Holdings Berhad recorded an accrual ratio of -0.37. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of RM1.4b during the period, dwarfing its reported profit of RM510.9m. Astro Malaysia Holdings Berhad's free cash flow improved over the last year, which is generally good to see.
Our Take On Astro Malaysia Holdings Berhad's Profit Performance
Happily for shareholders, Astro Malaysia Holdings Berhad produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Astro Malaysia Holdings Berhad's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! On the other hand, its EPS actually shrunk in 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 2 warning signs for Astro Malaysia Holdings Berhad you should know about.
This note has only looked at a single factor that sheds light on the nature of Astro Malaysia 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.
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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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