We Think GuocoLand (Malaysia) Berhad's (KLSE:GUOCO) Robust Earnings Are Conservative

Even though GuocoLand (Malaysia) Berhad's (KLSE:GUOCO) recent earnings release was robust, the market didn't seem to notice. We think that investors have missed some encouraging factors underlying the profit figures.

Check out our latest analysis for GuocoLand (Malaysia) Berhad

Zooming In On GuocoLand (Malaysia) 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'.

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 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 March 2021, GuocoLand (Malaysia) Berhad had an accrual ratio of -0.12. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of RM312m in the last year, which was a lot more than its statutory profit of RM51.0m. Notably, GuocoLand (Malaysia) Berhad had negative free cash flow last year, so the RM312m it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of GuocoLand (Malaysia) Berhad.

Our Take On GuocoLand (Malaysia) Berhad's Profit Performance

GuocoLand (Malaysia) Berhad's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think GuocoLand (Malaysia) Berhad's earnings potential is at least as good as it seems, and maybe even better! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. 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 3 warning signs for GuocoLand (Malaysia) Berhad (of which 1 is potentially serious!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of GuocoLand (Malaysia) Berhad's profit. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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