Despite posting some strong earnings, the market for 7-Eleven Malaysia Holdings Berhad's (KLSE:SEM) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.
View our latest analysis for 7-Eleven Malaysia Holdings Berhad
Examining Cashflow Against 7-Eleven Malaysia Holdings 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. 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Over the twelve months to December 2024, 7-Eleven Malaysia Holdings Berhad recorded an accrual ratio of 0.35. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. In the last twelve months it actually had negative free cash flow, with an outflow of RM116m despite its profit of RM41.6m, mentioned above. We saw that FCF was RM48m a year ago though, so 7-Eleven Malaysia Holdings Berhad has at least been able to generate positive FCF in the past. One positive for 7-Eleven Malaysia Holdings Berhad shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.
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 7-Eleven Malaysia Holdings Berhad's Profit Performance
As we have made quite clear, we're a bit worried that 7-Eleven Malaysia Holdings Berhad didn't back up the last year's profit with free cashflow. For this reason, we think that 7-Eleven Malaysia Holdings Berhad's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that it earned a profit in the last twelve months, despite its previous loss. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. You'd be interested to know, that we found 2 warning signs for 7-Eleven Malaysia Holdings Berhad and you'll want to know about these bad boys.