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Soft earnings didn't appear to concern Intraco Limited's (SGX:I06) shareholders over the last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.
A Closer Look At Intraco'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'.
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. 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.
Intraco has an accrual ratio of -0.16 for the year to December 2024. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of S$5.2m in the last year, which was a lot more than its statutory profit of S$2.03m. Intraco did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie. However, as we will discuss below, we can see that the company's accrual ratio has been impacted by its tax situation.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Intraco .
An Unusual Tax Situation
Moving on from the accrual ratio, we note that Intraco profited from a tax benefit which contributed S$236k to profit. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. The receipt of a tax benefit is obviously a good thing, on its own. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. While we think it's good that the company has booked a tax benefit, it does mean that there's every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.