The market appeared disappointed with the announcement of last week’s results of Pelikan International Corporation Berhad (KLSE: PELIKAN) despite the healthy numbers. We have dug and believe investors are missing any encouraging factors in the underlying numbers.
Check out our latest review for Pelikan International Corporation Berhad
Focus on the benefits of Pelikan International Corporation Berhad
As finance nerds already know, the cash flow adjustment ratio is a key metric for assessing how well a business’s free cash flow (FCF) matches its profits. The accrual ratio subtracts FCF from profit for a given period and divides the profit by the company’s average operating assets over that period. This ratio tells us to what extent a company’s earnings are not supported by free cash flow.
Therefore, it is actually considered a good thing when a company has a negative accumulation ratio, but a bad thing if its accumulation ratio is positive. While it is not a problem to have a positive accumulation ratio, indicating some level of non-cash profits, a high accumulation ratio is arguably a bad thing, as it indicates that paper profits do not match. to cash flow. Notably, some academic evidence suggests that a high accumulation ratio is a bad sign for short-term profits, in general.
Pelikan International Corporation Berhad has an accrual ratio of -0.13 for the year up to September 2021. As a result, its statutory profits were well below its free cash flow. Namely, it produced free cash flow of RM 114 million during the period, eclipsing its reported profit of RM 10.0 million. Given that Pelikan International Corporation Berhad had negative free cash flow in the previous corresponding period, the last twelve months profit of RM 114 million appears to be a step in the right direction.
To note: we always recommend that investors check the strength of the balance sheet. Click here to access our analysis of Pelikan International Corporation Berhad’s balance sheet.
Our perspective on Pelikan International Corporation Berhad profits
Pelikan International Corporation Berhad’s accumulation ratio is strong and indicates high free cash flow as we saw above. Based on this observation, we consider it likely that Pelikan International Corporation Berhad’s statutory profit is in fact underestimating its earning potential! And on top of that, its earnings per share have grown at an extremely impressive rate over the past three years. The aim of this article has been to assess how well we can rely on statutory profits to reflect the potential of the business, but there is much more to consider. If you would like to learn more about Pelikan International Corporation Berhad as a business, it is important to be aware of the risks it faces. When we did our research we found 3 warning signs for Pelikan International Corporation Berhad (2 make us uncomfortable!) Which we think deserve your full attention.
Today we zoomed in on a single data point to better understand the nature of Pelikan International Corporation Berhad’s profits. But there are plenty of other ways to give your opinion about a business. For example, many people see a high return on equity as an indication of a favorable business economy, while others like to “follow the money” and look for stocks that insiders are buying. So you might want to see this free a set of companies offering a high return on equity, or that list of stocks that insiders buy.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.