Despite posting some strong earnings, the market for TASCO Berhad's (KLSE:TASCO) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.
A Closer Look At TASCO Berhad's Earnings
Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. 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.
TASCO Berhad has an accrual ratio of 0.21 for the year to September 2026. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of RM164m, in contrast to the aforementioned profit of RM35.4m. We saw that FCF was RM219m a year ago though, so TASCO Berhad has at least been able to generate positive FCF in the past. The good news for shareholders is that TASCO Berhad's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. As a result, some shareholders may be looking for stronger cash conversion in the current year.
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 TASCO Berhad's Profit Performance
TASCO 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 TASCO Berhad's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 18% 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. So while earnings quality is important, it's equally important to consider the risks facing TASCO Berhad at this point in time. For example, TASCO Berhad has 3 warning signs (and 1 which is significant) we think you should know about.
Today we've zoomed in on a single data point to better understand the nature of TASCO Berhad's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.