We Think Amtel Holdings Berhad's (KLSE:AMTEL) Robust Earnings Are Conservative

The subdued stock price reaction suggests that Amtel Holdings Berhad's (KLSE:AMTEL) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

Check out our latest analysis for Amtel Holdings Berhad

Examining Cashflow Against Amtel Holdings Berhad's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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 November 2023, Amtel Holdings Berhad recorded an accrual ratio of -0.14. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of RM12m in the last year, which was a lot more than its statutory profit of RM5.51m. Given that Amtel Holdings Berhad had negative free cash flow in the prior corresponding period, the trailing twelve month resul of RM12m would seem to be a step in the right direction.

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

Our Take On Amtel Holdings Berhad's Profit Performance

As we discussed above, Amtel Holdings Berhad has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Amtel Holdings Berhad's statutory profit actually understates its earnings potential! Furthermore, it has done a great job growing EPS over the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Amtel Holdings Berhad at this point in time. At Simply Wall St, we found 1 warning sign for Amtel Holdings Berhad and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Amtel Holdings Berhad's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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. 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.