Lingkaran Trans Kota Holdings Berhad's (KLSE:LITRAK) Soft Earnings Are Actually Better Than They Appear

Shareholders appeared unconcerned with Lingkaran Trans Kota Holdings Berhad's (KLSE:LITRAK) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Check out our latest analysis for Lingkaran Trans Kota Holdings Berhad

A Closer Look At Lingkaran Trans Kota 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. 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 June 2021, Lingkaran Trans Kota Holdings Berhad recorded an accrual ratio of -0.10. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of RM343m during the period, dwarfing its reported profit of RM216.5m. Lingkaran Trans Kota Holdings Berhad's free cash flow improved over the last year, which is generally good to see.

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 Lingkaran Trans Kota Holdings Berhad's Profit Performance

As we discussed above, Lingkaran Trans Kota Holdings Berhad has perfectly satisfactory free cash flow relative to profit. Because of this, we think Lingkaran Trans Kota Holdings 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. So while earnings quality is important, it's equally important to consider the risks facing Lingkaran Trans Kota Holdings Berhad at this point in time. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Lingkaran Trans Kota Holdings Berhad.

This note has only looked at a single factor that sheds light on the nature of Lingkaran Trans Kota 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.
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