Weak Statutory Earnings May Not Tell The Whole Story For Seni Jaya Corporation Berhad (KLSE:SJC)

Despite Seni Jaya Corporation Berhad's (KLSE:SJC) most recent earnings report having soft headline numbers, its stock has had a positive performance. We did some analysis and found some positive factors that investors might be paying attention to rather than profit.

View our latest analysis for Seni Jaya Corporation Berhad

Zooming In On Seni Jaya Corporation 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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to June 2024, Seni Jaya Corporation Berhad had an accrual ratio of 0.46. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of RM18m, in contrast to the aforementioned profit of RM7.30m. We also note that Seni Jaya Corporation Berhad's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of RM18m. Having said that, there is more to consider. We can look at how unusual items in the profit and loss statement impacted its accrual ratio, as well as explore how dilution is impacting shareholders negatively.

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

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Seni Jaya Corporation Berhad issued 10.0% more new shares over the last year. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Seni Jaya Corporation Berhad's EPS by clicking here.

A Look At The Impact Of Seni Jaya Corporation Berhad's Dilution On Its Earnings Per Share (EPS)

Three years ago, Seni Jaya Corporation Berhad lost money. Even looking at the last year, profit was still down 52%. Sadly, earnings per share fell further, down a full 84% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Seni Jaya Corporation Berhad's earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

The Impact Of Unusual Items On Profit

Unfortunately (in the short term) Seni Jaya Corporation Berhad saw its profit reduced by unusual items worth RM2.0m. If this was a non-cash charge, it would have made the accrual ratio better, if cashflow had stayed strong, so it's not great to see in combination with an uninspiring accrual ratio. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. If Seni Jaya Corporation Berhad doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Seni Jaya Corporation Berhad's Profit Performance

In conclusion, Seni Jaya Corporation Berhad's accrual ratio suggests that its statutory earnings are not backed by cash flow; but the fact unusual items actually weighed on profit may create upside if those unusual items to not recur. And the dilution means that per-share results are weaker than the bottom line might imply. Based on these factors, we think that Seni Jaya Corporation Berhad's statutory profits probably make it seem better than it is on an underlying level. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. To help with this, we've discovered 5 warning signs (2 make us uncomfortable!) that you ought to be aware of before buying any shares in Seni Jaya Corporation Berhad.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.