There Are Some Holes In Radium Development Berhad's (KLSE:RADIUM) Solid Earnings Release

Solid profit numbers didn't seem to be enough to please Radium Development Berhad's (KLSE:RADIUM) shareholders. Our analysis has found some concerning factors which weaken the profit's foundation.

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A Closer Look At Radium Development Berhad's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. 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 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Radium Development Berhad has an accrual ratio of 0.72 for the year to June 2025. 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. Even though it reported a profit of RM14.3m, a look at free cash flow indicates it actually burnt through RM568m in the last year. We also note that Radium Development Berhad's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of RM568m. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Check out our latest analysis for Radium Development Berhad

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

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Radium Development Berhad's profit was boosted by unusual items worth RM4.2m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Radium Development Berhad's Profit Performance

Radium Development Berhad had a weak accrual ratio, but its profit did receive a boost from unusual items. For the reasons mentioned above, we think that a perfunctory glance at Radium Development Berhad's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Radium Development Berhad, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for Radium Development Berhad you should know about.

Our examination of Radium Development Berhad has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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.