Weak Statutory Earnings May Not Tell The Whole Story For KTI Landmark Berhad (KLSE:KTI)

The subdued market reaction suggests that KTI Landmark Berhad's (KLSE:KTI) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

View our latest analysis for KTI Landmark Berhad

A Closer Look At KTI Landmark 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. 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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 December 2024, KTI Landmark Berhad had an accrual ratio of 0.52. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of RM186m despite its profit of RM8.53m, mentioned above. We also note that KTI Landmark Berhad's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of RM186m.

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

Our Take On KTI Landmark Berhad's Profit Performance

As we discussed above, we think KTI Landmark Berhad's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that KTI Landmark Berhad's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 5 warning signs for KTI Landmark Berhad (of which 3 shouldn't be ignored!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of KTI Landmark 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. 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.

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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.