Even though Southern Cable Group Berhad( KLSE:SCGBHD ) posted strong earnings recently, the stock hasn't reacted in a large way. We think that investors might be worried about the foundations the earnings are built on.
Zooming In On Southern Cable Group 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. 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 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
Southern Cable Group Berhad has an accrual ratio of 0.32 for the year to September 2025. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. In the last twelve months it actually had negative free cash flow, with an outflow of RM53m despite its profit of RM120.0m, mentioned above. It's worth noting that Southern Cable Group Berhad generated positive FCF of RM30m a year ago, so at least they've done it in the past. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.
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.
To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Southern Cable Group Berhad issued 27% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Southern Cable Group Berhad's historical EPS growth by clicking on this link .
A Look At The Impact Of Southern Cable Group Berhad's Dilution On Its Earnings Per Share (EPS)
As you can see above, Southern Cable Group Berhad has been growing its net income over the last few years, with an annualized gain of 836% over three years. But EPS was only up 710% per year, in the exact same period. And the 102% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 77% over the same period. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.
Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Southern Cable Group Berhad shareholders will want to see that EPS figure continue to increase. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.
Our Take On Southern Cable Group Berhad's Profit Performance
In conclusion, Southern Cable Group Berhad has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means its earnings per share growth is weaker than its profit growth. Considering all this we'd argue Southern Cable Group Berhad's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Southern Cable Group Berhad, you'd also look into what risks it is currently facing. For example, we've found that Southern Cable Group Berhad has 2 warning signs (1 is concerning!) that deserve your attention before going any further with your analysis.
In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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.
