Memiontec Holdings Ltd.’s (Catalist:TWL) robust recent earnings didn’t do much to move the stock. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.
View our latest analysis for Memiontec Holdings
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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company’s average operating assets over that period. This ratio tells us how much of a company’s profit is not backed by free cashflow.
That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. That’s because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Memiontec Holdings has an accrual ratio of 0.58 for the year to June 2024. Statistically speaking, that’s a real negative for future earnings. And indeed, during the period the company didn’t produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of S$6.2m, in contrast to the aforementioned profit of S$3.31m. We saw that FCF was S$1.7m a year ago though, so Memiontec Holdings has at least been able to generate positive FCF in the past.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Memiontec Holdings.
As we have made quite clear, we’re a bit worried that Memiontec Holdings didn’t back up the last year’s profit with free cashflow. For this reason, we think that Memiontec Holdings’ statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. If you want to do dive deeper into Memiontec Holdings, you’d also look into what risks it is currently facing. To help with this, we’ve discovered 3 warning signs (1 is potentially serious!) that you ought to be aware of before buying any shares in Memiontec Holdings.
This note has only looked at a single factor that sheds light on the nature of Memiontec Holdings’ 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.