ASL Marine Holdings' (SGX:A04) Solid Earnings Are Supported By Other Strong Factors

When companies post strong earnings, the stock generally performs well, just like ASL Marine Holdings Ltd.'s (SGX:A04) stock has recently. We did some digging and found some further encouraging factors that investors will like.

Check out our latest analysis for ASL Marine Holdings

A Closer Look At ASL Marine Holdings' 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.

For the year to June 2023, ASL Marine Holdings had an accrual ratio of -0.19. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of S$67m in the last year, which was a lot more than its statutory profit of S$3.54m. ASL Marine Holdings' free cash flow improved over the last year, which is generally good to see. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of ASL Marine Holdings.

The Impact Of Unusual Items On Profit

Surprisingly, given ASL Marine Holdings' accrual ratio implied strong cash conversion, its paper profit was actually boosted by S$9.4m in unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. We can see that ASL Marine Holdings' positive unusual items were quite significant relative to its profit in the year to June 2023. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On ASL Marine Holdings' Profit Performance

In conclusion, ASL Marine Holdings' accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Based on these factors, it's hard to tell if ASL Marine Holdings' profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into ASL Marine Holdings, you'd also look into what risks it is currently facing. To that end, you should learn about the 4 warning signs we've spotted with ASL Marine Holdings (including 1 which doesn't sit too well with us).

Our examination of ASL Marine Holdings has focussed on certain factors that can make its earnings look better than they are. 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.