Epicon Berhad's (KLSE:EPICON) stock rose after it released a robust earnings report. However, we think that shareholders should be aware of some other factors beyond the profit numbers.
Examining Cashflow Against Epicon 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. This ratio tells us how much of a company's profit is not backed by free cashflow.
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 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.
Over the twelve months to December 2024, Epicon Berhad recorded an accrual ratio of 1.22. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of RM51m, in contrast to the aforementioned profit of RM9.35m. It's worth noting that Epicon Berhad generated positive FCF of RM1.7m a year ago, so at least they've done it in the past. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Epicon Berhad.
In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Epicon Berhad expanded the number of shares on issue by 5.5% over the last year. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Epicon Berhad's historical EPS growth by clicking on this link.
A Look At The Impact Of Epicon Berhad's Dilution On Its Earnings Per Share (EPS)
Three years ago, Epicon Berhad lost money. The good news is that profit was up 115% in the last twelve months. On the other hand, earnings per share are only up 86% over the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.