Some Investors May Be Willing To Look Past HCK Capital Group Berhad's (KLSE:HCK) Soft Earnings

Shareholders appeared unconcerned with HCK Capital Group Berhad's (KLSE:HCK) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Our free stock report includes 1 warning sign investors should be aware of before investing in HCK Capital Group Berhad. Read for free now.

A Closer Look At HCK Capital Group 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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 December 2024, HCK Capital Group Berhad recorded an accrual ratio of -0.27. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of RM208m, well over the RM20.7m it reported in profit. Notably, HCK Capital Group Berhad had negative free cash flow last year, so the RM208m it produced this year was a welcome improvement. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of HCK Capital Group Berhad.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. HCK Capital Group Berhad expanded the number of shares on issue by 15% 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. Check out HCK Capital Group Berhad's historical EPS growth by clicking on this link.

A Look At The Impact Of HCK Capital Group Berhad's Dilution On Its Earnings Per Share (EPS)

As you can see above, HCK Capital Group Berhad has been growing its net income over the last few years, with an annualized gain of 879% over three years. In comparison, earnings per share only gained 680% over the same period. Net income was down 17% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 26%. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if HCK Capital Group Berhad's earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On HCK Capital Group Berhad's Profit Performance

In conclusion, HCK Capital Group Berhad has a strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share are dropping faster than its profit. Based on these factors, we think that HCK Capital Group Berhad's profits are a reasonably conservative guide to its underlying profitability. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Every company has risks, and we've spotted 1 warning sign for HCK Capital Group Berhad you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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 with significant insider holdings 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.