Some May Be Optimistic About SNS Network Technology Berhad's (KLSE:SNS) Earnings

The market was pleased with the recent earnings report from SNS Network Technology Berhad (KLSE:SNS), despite the profit numbers being soft. We think that investors might be looking at some positive factors beyond the earnings numbers.

Check out our latest analysis for SNS Network Technology Berhad

Examining Cashflow Against SNS Network Technology 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

SNS Network Technology Berhad has an accrual ratio of -0.13 for the year to April 2024. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. Indeed, in the last twelve months it reported free cash flow of RM62m, well over the RM27.8m it reported in profit. Notably, SNS Network Technology Berhad had negative free cash flow last year, so the RM62m 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 SNS Network Technology Berhad.

Our Take On SNS Network Technology Berhad's Profit Performance

SNS Network Technology Berhad's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think SNS Network Technology Berhad's earnings potential is at least as good as it seems, and maybe even better! Unfortunately, though, its earnings per share actually fell back over the 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. If you want to do dive deeper into SNS Network Technology Berhad, you'd also look into what risks it is currently facing. At Simply Wall St, we found 1 warning sign for SNS Network Technology Berhad and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of SNS Network Technology 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 with high insider ownership.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com