YLI Holdings Berhad's (KLSE:YLI ) stock didn't jump after it announced some healthy earnings. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.
View our latest analysis for YLI Holdings Berhad
Examining Cashflow Against YLI Holdings 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). 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.
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.
YLI Holdings Berhad has an accrual ratio of 0.42 for the year to September 2024. 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. In the last twelve months it actually had negative free cash flow, with an outflow of RM48m despite its profit of RM9.00m, mentioned above. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of RM48m, this year, indicates high risk.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of YLI Holdings Berhad.
Our Take On YLI Holdings Berhad's Profit Performance
As we have made quite clear, we're a bit worried that YLI Holdings Berhad didn't back up the last year's profit with free cashflow. For this reason, we think that YLI Holdings Berhad's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Be aware that YLI Holdings Berhad is showing 3 warning signs in our investment analysis and 2 of those are significant...