Hong Leong Industries Berhad (KLSE:HLIND) announced a healthy earnings result recently, and the market rewarded it with a strong uplift in the stock price. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.
See our latest analysis for Hong Leong Industries 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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company’s average operating assets over that period. You could think of the accrual ratio from cashflow as the ‘non-FCF profit ratio’.
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. That is not intended to imply we should worry about a positive accrual ratio, but it’s worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, “firms with higher accruals tend to be less profitable in the future”.
Hong Leong Industries Berhad has an accrual ratio of -0.38 for the year to June 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of RM628m during the period, dwarfing its reported profit of RM387.9m. Hong Leong Industries 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, Hong Leong Industries Berhad’s accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Hong Leong Industries Berhad’s underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 37% annually, over the last three years. Of course, we’ve only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you’d like to know more about Hong Leong Industries Berhad as a business, it’s important to be aware of any risks it’s facing. To that end, you should learn about the 2 warning signs we’ve spotted with Hong Leong Industries Berhad (including 1 which can’t be ignored).
Today we’ve zoomed in on a single data point to better understand the nature of Hong Leong Industries 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.