PETRONAS Dagangan Berhad (KLSE:PETDAG) announced a healthy earnings result recently, and the market rewarded it with a strong uplift in the stock price. This reaction by the market reaction is understandable when looking at headline profits and we have found some further encouraging factors.
View our latest analysis for PETRONAS Dagangan Berhad
A Closer Look At PETRONAS Dagangan 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. The ratio shows us how much a company's profit exceeds its FCF.
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 September 2024, PETRONAS Dagangan Berhad recorded an accrual ratio of -0.25. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of RM1.7b during the period, dwarfing its reported profit of RM1.02b. PETRONAS Dagangan Berhad did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.
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 PETRONAS Dagangan Berhad's Profit Performance
Happily for shareholders, PETRONAS Dagangan Berhad produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think PETRONAS Dagangan Berhad's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing PETRONAS Dagangan Berhad at this point in time. While conducting our analysis, we found that PETRONAS Dagangan Berhad has 1 warning sign and it would be unwise to ignore this.