Statutory Profit Doesn't Reflect How Good Visdynamics Holdings Berhad's (KLSE:VIS) Earnings Are

Even though Visdynamics Holdings Berhad's (KLSE:VIS) 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 Visdynamics Holdings Berhad

A Closer Look At Visdynamics Holdings 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. 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.

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 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.

Over the twelve months to January 2021, Visdynamics Holdings Berhad recorded an accrual ratio of -0.16. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of RM12m in the last year, which was a lot more than its statutory profit of RM6.66m. Visdynamics Holdings 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 Visdynamics Holdings Berhad.

Our Take On Visdynamics Holdings Berhad's Profit Performance

As we discussed above, Visdynamics Holdings Berhad has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Visdynamics Holdings Berhad's statutory profit actually understates its earnings potential! And the EPS is up 7.4% 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 Visdynamics Holdings Berhad as a business, it's important to be aware of any risks it's facing. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Visdynamics Holdings Berhad.

This note has only looked at a single factor that sheds light on the nature of Visdynamics Holdings 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. 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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