Why Binastra Corporation Berhad's (KLSE:BNASTRA) Earnings Are Weaker Than They Seem

We didn't see Binastra Corporation Berhad's (KLSE:BNASTRA) stock surge when it reported robust earnings recently. We decided to have a deeper look, and we believe that investors might be worried about several concerning factors that we found.

See our latest analysis for Binastra Corporation Berhad

Examining Cashflow Against Binastra Corporation 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'.

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.

Over the twelve months to January 2024, Binastra Corporation Berhad recorded an accrual ratio of 0.71. Ergo, its free cash flow is significantly weaker than its profit. As a general rule, that bodes poorly for future profitability. To wit, it produced free cash flow of RM2.8m during the period, falling well short of its reported profit of RM41.6m. Given that Binastra Corporation Berhad had negative free cash flow in the prior corresponding period, the trailing twelve month resul of RM2.8m would seem to be a step in the right direction. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

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

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Binastra Corporation Berhad increased the number of shares on issue by 18% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out Binastra Corporation Berhad's historical EPS growth by clicking on this link.

A Look At The Impact Of Binastra Corporation Berhad's Dilution On Its Earnings Per Share (EPS)

Binastra Corporation Berhad was losing money three years ago. On the bright side, in the last twelve months it grew profit by 152%. On the other hand, earnings per share are only up 14% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Binastra Corporation Berhad shareholders will want to see that EPS figure continue to increase. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Binastra Corporation Berhad's Profit Performance

As it turns out, Binastra Corporation Berhad couldn't match its profit with cashflow and its dilution means that earnings per share growth is lagging net income growth. For the reasons mentioned above, we think that a perfunctory glance at Binastra Corporation Berhad's statutory profits might make it look better than it really is on an underlying level. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. When we did our research, we found 2 warning signs for Binastra Corporation Berhad (1 makes us a bit uncomfortable!) that we believe deserve your full attention.

Our examination of Binastra Corporation 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 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. 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. 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.