Investors were underwhelmed by the solid earnings posted by Golden Pharos Berhad (KLSE:GPHAROS) recently. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.
See our latest analysis for Golden Pharos Berhad
A Closer Look At Golden Pharos Berhad's Earnings
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
Over the twelve months to June 2024, Golden Pharos Berhad recorded an accrual ratio of -0.15. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of RM28m during the period, dwarfing its reported profit of RM16.9m. Golden Pharos Berhad shareholders are no doubt pleased that free cash flow improved over the last twelve months.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Golden Pharos Berhad.
Our Take On Golden Pharos Berhad's Profit Performance
Golden Pharos Berhad's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Golden Pharos Berhad's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share increased by 45% in 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. In terms of investment risks, we've identified 2 warning signs with Golden Pharos Berhad, and understanding them should be part of your investment process.
Today we've zoomed in on a single data point to better understand the nature of Golden Pharos Berhad's profit. But there are plenty of other ways to inform your opinion of a company. 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 with significant insider holdings 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.