Soft earnings didn't appear to concern Eversendai Corporation Berhad's (KLSE:SENDAI) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.
Examining Cashflow Against Eversendai Corporation Berhad's Earnings
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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'.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Eversendai Corporation Berhad has an accrual ratio of -0.18 for the year to December 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of RM207m in the last year, which was a lot more than its statutory profit of RM13.4m. Eversendai Corporation Berhad's free cash flow improved over the last year, which is generally good to see. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.
View our latest analysis for Eversendai Corporation Berhad
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Eversendai Corporation Berhad.
The Impact Of Unusual Items On Profit
Surprisingly, given Eversendai Corporation Berhad's accrual ratio implied strong cash conversion, its paper profit was actually boosted by RM3.3m in unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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. And that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).