We Think You Can Look Beyond Y.S.P. Southeast Asia Holding Berhad's (KLSE:YSPSAH) Lackluster Earnings

Shareholders appeared unconcerned with Y.S.P. Southeast Asia Holding Berhad's (KLSE:YSPSAH) lackluster earnings report last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

See our latest analysis for Y.S.P. Southeast Asia Holding Berhad

Examining Cashflow Against Y.S.P. Southeast Asia Holding Berhad's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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 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. 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 December 2021, Y.S.P. Southeast Asia Holding Berhad had an accrual ratio of -0.16. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of RM62m during the period, dwarfing its reported profit of RM15.2m. Given that Y.S.P. Southeast Asia Holding Berhad had negative free cash flow in the prior corresponding period, the trailing twelve month resul of RM62m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Y.S.P. Southeast Asia Holding Berhad.

Our Take On Y.S.P. Southeast Asia Holding Berhad's Profit Performance

Happily for shareholders, Y.S.P. Southeast Asia Holding Berhad produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Y.S.P. Southeast Asia Holding 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. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into Y.S.P. Southeast Asia Holding Berhad, you'd also look into what risks it is currently facing. For example, Y.S.P. Southeast Asia Holding Berhad has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of Y.S.P. Southeast Asia Holding Berhad's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.