Teo Guan Lee Corporation Berhad's (KLSE:TGL) Conservative Accounting Might Explain Soft Earnings

Soft earnings didn't appear to concern Teo Guan Lee Corporation Berhad's (KLSE:TGL) shareholders over the last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

Check out our latest analysis for Teo Guan Lee Corporation Berhad

Zooming In On Teo Guan Lee Corporation 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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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.

Teo Guan Lee Corporation Berhad has an accrual ratio of -0.14 for the year to March 2021. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of RM14m, well over the RM4.97m it reported in profit. Teo Guan Lee Corporation Berhad shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Teo Guan Lee Corporation Berhad.

Our Take On Teo Guan Lee Corporation Berhad's Profit Performance

As we discussed above, Teo Guan Lee Corporation Berhad has perfectly satisfactory free cash flow relative to profit. Because of this, we think Teo Guan Lee Corporation Berhad's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 13% annually, over the last three years. 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. If you'd like to know more about Teo Guan Lee Corporation Berhad as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 3 warning signs for Teo Guan Lee Corporation Berhad and you'll want to know about these bad boys.

Today we've zoomed in on a single data point to better understand the nature of Teo Guan Lee Corporation 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. 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 that insiders are buying to be useful.

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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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