ITMAX System Berhad's (KLSE:ITMAX) healthy profit numbers didn't contain any surprises for investors. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.
View our latest analysis for ITMAX System Berhad
Examining Cashflow Against ITMAX System 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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. The ratio shows us how much a company's profit exceeds its FCF.
Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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, ITMAX System Berhad recorded an accrual ratio of 0.44. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of RM26m, in contrast to the aforementioned profit of RM76.0m. It's worth noting that ITMAX System Berhad generated positive FCF of RM29m a year ago, so at least they've done it in the past.
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 ITMAX System Berhad's Profit Performance
As we discussed above, we think ITMAX System Berhad's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that ITMAX System Berhad's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 17% EPS growth 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. So while earnings quality is important, it's equally important to consider the risks facing ITMAX System Berhad at this point in time. You'd be interested to know, that we found 1 warning sign for ITMAX System Berhad and you'll want to know about it.