Uchi Technologies Berhad's (KLSE:UCHITEC) healthy profit numbers didn't contain any surprises for investors. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.
Check out our latest analysis for Uchi Technologies Berhad
Zooming In On Uchi Technologies 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. 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.
That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Uchi Technologies Berhad has an accrual ratio of 0.43 for the year to June 2024. Ergo, its free cash flow is significantly weaker than its profit. As a general rule, that bodes poorly for future profitability. Indeed, in the last twelve months it reported free cash flow of RM114m, which is significantly less than its profit of RM133.3m. Uchi Technologies Berhad shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down over the last twelve months.
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 Uchi Technologies Berhad's Profit Performance
As we discussed above, we think Uchi Technologies 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 Uchi Technologies Berhad's underlying earnings power is lower than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 31% over the last three years. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Be aware that Uchi Technologies Berhad is showing 2 warning signs in our investment analysis and 1 of those doesn't sit too well with us...