NCT Alliance Berhad's (KLSE:NCT) Earnings Seem To Be Promising

The market seemed underwhelmed by last week's earnings announcement from NCT Alliance Berhad (KLSE:NCT) despite the healthy numbers. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

View our latest analysis for NCT Alliance Berhad

Zooming In On NCT Alliance 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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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 September 2024, NCT Alliance Berhad had an accrual ratio of -0.26. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of RM244m during the period, dwarfing its reported profit of RM40.0m. NCT Alliance Berhad's free cash flow improved over the last year, which is generally good to see. 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 NCT Alliance Berhad.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, NCT Alliance Berhad issued 16% more new shares over the last year. That means its earnings are split among a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of NCT Alliance Berhad's EPS by clicking here.

How Is Dilution Impacting NCT Alliance Berhad's Earnings Per Share (EPS)?

NCT Alliance Berhad has improved its profit over the last three years, with an annualized gain of 72% in that time. In contrast, earnings per share were actually down by 30% per year, in the exact same period. However, net income was pretty flat over the last year with a miniscule decrease. Meanwhile, EPS was actually down a full 11% over the period, highlighting just how different the profits look from a per-share perspective. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if NCT Alliance 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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On NCT Alliance Berhad's Profit Performance

In conclusion, NCT Alliance 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. Considering all the aforementioned, we'd venture that NCT Alliance Berhad's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example - NCT Alliance Berhad has 1 warning sign we think you should be aware of.

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 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 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.