We Think That There Are Issues Underlying Menang Corporation (M) Berhad's (KLSE:MENANG) Earnings

Menang Corporation (M) Berhad's (KLSE:MENANG) stock was strong after they recently reported robust earnings. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.

Check out our latest analysis for Menang Corporation (M) Berhad

Examining Cashflow Against Menang Corporation (M) Berhad's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Menang Corporation (M) Berhad has an accrual ratio of -0.16 for the year to June 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of RM144m in the last year, which was a lot more than its statutory profit of RM26.1m. Menang Corporation (M) Berhad shareholders are no doubt pleased that free cash flow improved over the last twelve months. Unfortunately for shareholders, the company has also been issuing new shares, diluting 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 Menang Corporation (M) Berhad.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Menang Corporation (M) Berhad expanded the number of shares on issue by 35% over the last year. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out Menang Corporation (M) Berhad's historical EPS growth by clicking on this link.

How Is Dilution Impacting Menang Corporation (M) Berhad's Earnings Per Share (EPS)?

Menang Corporation (M) Berhad has improved its profit over the last three years, with an annualized gain of 264% in that time. But EPS was only up 237% per year, in the exact same period. And the 51% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 48% in that time. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Menang Corporation (M) Berhad can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Menang Corporation (M) Berhad's Profit Performance

In conclusion, Menang Corporation (M) Berhad has strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share growth is weaker than its profit growth. Given the contrasting considerations, we don't have a strong view as to whether Menang Corporation (M) Berhad's profits are an apt reflection of its underlying potential for profit. If you'd like to know more about Menang Corporation (M) Berhad as a business, it's important to be aware of any risks it's facing. For example - Menang Corporation (M) Berhad has 1 warning sign we think you should be aware of.

Our examination of Menang Corporation (M) Berhad has focussed on certain factors that can make its earnings look better than they are. 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. 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.