There May Be Reason For Hope In Astro Malaysia Holdings Berhad's (KLSE:ASTRO) Disappointing Earnings

Shareholders appeared unconcerned with Astro Malaysia Holdings Berhad's (KLSE:ASTRO) lackluster earnings report last week. We did some digging, and we believe the earnings are stronger than they seem.

Check out our latest analysis for Astro Malaysia Holdings Berhad

Zooming In On Astro Malaysia Holdings 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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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 2023, Astro Malaysia Holdings Berhad recorded an accrual ratio of -0.29. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of RM695m during the period, dwarfing its reported profit of RM57.5m. Over the last year, Astro Malaysia Holdings Berhad's free cash flow remained steady. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

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.

How Do Unusual Items Influence Profit?

Astro Malaysia Holdings Berhad's profit was reduced by unusual items worth RM65m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. In a scenario where those unusual items included non-cash charges, we'd expect to see a strong accrual ratio, which is exactly what has happened in this case. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Astro Malaysia Holdings Berhad to produce a higher profit next year, all else being equal.

Our Take On Astro Malaysia Holdings Berhad's Profit Performance

Considering both Astro Malaysia Holdings Berhad's accrual ratio and its unusual items, we think its statutory earnings are unlikely to exaggerate the company's underlying earnings power. After considering all this, we reckon Astro Malaysia Holdings Berhad's statutory profit probably understates its earnings potential! If you'd like to know more about Astro Malaysia Holdings Berhad as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Astro Malaysia Holdings Berhad (including 1 which shouldn't be ignored).

After our examination into the nature of Astro Malaysia Holdings Berhad's profit, we've come away optimistic for the company. 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. 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.