PLYTEC Holding Berhad (KLSE:PLYTEC) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.
Zooming In On PLYTEC Holding 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
For the year to December 2024, PLYTEC Holding Berhad had an accrual ratio of 0.23. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of RM13.3m, a look at free cash flow indicates it actually burnt through RM27m in the last year. We also note that PLYTEC Holding Berhad's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of RM27m.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of PLYTEC Holding Berhad.
Our Take On PLYTEC Holding Berhad's Profit Performance
PLYTEC Holding 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 PLYTEC Holding Berhad's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 74% EPS growth in the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about PLYTEC Holding Berhad as a business, it's important to be aware of any risks it's facing. When we did our research, we found 3 warning signs for PLYTEC Holding Berhad (1 makes us a bit uncomfortable!) that we believe deserve your full attention.