Some May Be Optimistic About V.S. Industry Berhad's (KLSE:VS) Earnings

V.S. Industry Berhad's (KLSE:VS) recent soft profit numbers didn't appear to worry shareholders, as the stock price showed strength. We think that investors might be looking at some positive factors beyond the earnings numbers.

Check out our latest analysis for V.S. Industry Berhad

Zooming In On V.S. Industry 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.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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.

V.S. Industry Berhad has an accrual ratio of -0.12 for the year to January 2024. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of RM476m in the last year, which was a lot more than its statutory profit of RM152.7m. Notably, V.S. Industry Berhad had negative free cash flow last year, so the RM476m it produced this year was a welcome improvement.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On V.S. Industry Berhad's Profit Performance

As we discussed above, V.S. Industry Berhad has perfectly satisfactory free cash flow relative to profit. Because of this, we think V.S. Industry 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'd like to know more about V.S. Industry Berhad as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 1 warning sign for V.S. Industry Berhad you should be aware of.

This note has only looked at a single factor that sheds light on the nature of V.S. Industry 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 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.