Does Harbour-Link Group Berhad's (KLSE:HARBOUR) Statutory Profit Adequately Reflect Its Underlying Profit?

As a general rule, we think profitable companies are less risky than companies that lose money. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding Harbour-Link Group Berhad (KLSE:HARBOUR).

It's good to see that over the last twelve months Harbour-Link Group Berhad made a profit of RM26.3m on revenue of RM584.6m. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.

Check out our latest analysis for Harbour-Link Group Berhad

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. As a result, we think it's well worth considering what Harbour-Link Group Berhad's cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Harbour-Link Group Berhad.

Zooming In On Harbour-Link Group 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. 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. 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.

For the year to September 2020, Harbour-Link Group Berhad had an accrual ratio of -0.14. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of RM83m during the period, dwarfing its reported profit of RM26.3m. Given that Harbour-Link Group Berhad had negative free cash flow in the prior corresponding period, the trailing twelve month resul of RM83m would seem to be a step in the right direction.

Our Take On Harbour-Link Group Berhad's Profit Performance

As we discussed above, Harbour-Link Group Berhad has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Harbour-Link Group Berhad's statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 13% in 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. If you'd like to know more about Harbour-Link Group Berhad as a business, it's important to be aware of any risks it's facing. When we did our research, we found 3 warning signs for Harbour-Link Group Berhad (1 makes us a bit uncomfortable!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Harbour-Link Group 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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