Karyon Industries Berhad's (KLSE:KARYON) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.
View our latest analysis for Karyon Industries Berhad
Examining Cashflow Against Karyon Industries 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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.
Over the twelve months to June 2024, Karyon Industries Berhad recorded an accrual ratio of 0.21. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Over the last year it actually had negative free cash flow of RM12m, in contrast to the aforementioned profit of RM6.30m. We saw that FCF was RM19m a year ago though, so Karyon Industries Berhad has at least been able to generate positive FCF in the past. One positive for Karyon Industries 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. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Karyon Industries Berhad.
Our Take On Karyon Industries Berhad's Profit Performance
Karyon Industries Berhad's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that Karyon Industries Berhad's statutory profits are better than its underlying earnings power. The good news is that, its earnings per share increased by 47% 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. If you'd like to know more about Karyon Industries Berhad as a business, it's important to be aware of any risks it's facing. Be aware that Karyon Industries Berhad is showing 3 warning signs in our investment analysis and 1 of those is potentially serious...