Investors expressed discontent with CPE Technology Berhad (KLSE: CPETECH) earnings, even though the profit figures were robust. It appears that the market is scrutinizing some underlying elements that raise concerns.
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As aficionados in finance may be aware, the accrual ratio from cash flow serves as a pivotal metric for evaluating the alignment of a company’s free cash flow (FCF) with its net profit.
Essentially, this ratio is computed by subtracting FCF from net profit and dividing by the average operating assets during that timeframe. In simpler terms, this can be perceived as the ‘non-FCF profit ratio.’
A negative accrual ratio is regarded favorably, as it indicates that the entity is generating greater free cash flow than its profit suggests. Although a ratio exceeding zero does not immediately raise alarms, a notably high accrual ratio merits attention.
Research suggests that elevated accrual ratios may correlate with diminished profit or slower profit growth in the long run.
CPE Technology Berhad’s accrual ratio stood at 0.20 for the fiscal year ending September 2025, implying its free cash flow significantly lagged behind its reported profit.
In fact, over the previous twelve months, the company reported a free cash flow of RM833k, a stark contrast to its profit of RM24.7m. Although CPE Technology Berhad’s free cash flow diminished over the last year, there remains optimism for recovery in the upcoming year, given the inherent volatility of cash flow relative to accounting profits.
A silver lining for shareholders is that last year’s accrual ratio was considerably more favorable, suggesting that this year’s figures may simply reflect a temporary misalignment between profits and cash flow. Consequently, some investors may be seeking more robust cash conversion moving forward.
This raises questions regarding analysts’ future profitability forecasts. Fortunately, you can click here to explore an interactive graph illustrating future profitability predictions based on their analyses.
CPE Technology Berhad’s conversion of profit to free cash flow over the past year is perceived by some investors as suboptimal. As such, it is plausible that the company’s genuine earnings capacity is less than its statutory profit indicates.
Nonetheless, the encouraging aspect is that its EPS growth in the previous year has been commendable, albeit not a perfect indicator. Clearly, further scrutiny is warranted, encompassing margins, forecasted growth, and return on investment, among other determinants.
While the quality of earnings is paramount, it is equally crucial to evaluate the associated risks facing CPE Technology Berhad at this juncture. In this context, we have identified three warning signs (one of which is particularly concerning) that potential investors should consider prior to acquiring shares in CPE Technology Berhad.
Source link: Finance.yahoo.com.
