Mynews Holdings Berhad (KLSE:MYNEWS) just reported healthy earnings but the stock price didn’t move much. We think that investors have missed some encouraging factors underlying the profit figures.
Check out our latest analysis for Mynews Holdings Berhad
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). The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. The ratio shows us how much a company’s profit exceeds its FCF.
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. To quote a 2014 paper by Lewellen and Resutek, “firms with higher accruals tend to be less profitable in the future”.
Mynews Holdings Berhad has an accrual ratio of -0.21 for the year to July 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of RM67m during the period, dwarfing its reported profit of RM6.57m. Mynews Holdings Berhad shareholders are no doubt pleased that free cash flow improved over the last twelve months.
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.
As we discussed above, Mynews Holdings Berhad’s accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Mynews Holdings Berhad’s statutory profit actually understates its earnings potential! And it’s also positive that the company showed enough improvement to book a profit this year, after losing money 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. Ultimately, this article has formed an opinion based on historical data. However, it can also be great to think about what analysts are forecasting for the future. So feel free to check out our free graph representing analyst forecasts.
This note has only looked at a single factor that sheds light on the nature of Mynews Holdings Berhad’s profit. But there are plenty of other ways to inform your opinion of a company. 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.