Soft earnings didn't appear to concern Bermaz Auto Berhad's( KLSE:BAUTO ) 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 Bermaz Auto 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.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Bermaz Auto Berhad has an accrual ratio of -0.25 for the year to October 2025. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of RM211m in the last year, which was a lot more than its statutory profit of RM68.5m. Bermaz Auto Berhad's free cash flow improved over the last year, which is generally good to see.
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 Bermaz Auto Berhad's Profit Performance
Happily for shareholders, Bermaz Auto Berhad produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Bermaz Auto Berhad's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. At Simply Wall St, we found 2 warning signs for Bermaz Auto Berhad and we think they deserve your attention.
Today we've zoomed in on a single data point to better understand the nature of Bermaz Auto Berhad's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity , or this list of stocks with significant insider holdings to be useful.
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This article by Simply Wall St is general in nature.
We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
