Impressive Earnings May Not Tell The Whole Story For Radiant Globaltech Berhad (KLSE:RGTECH)
Radiant Globaltech Berhad (KLSE:RGTECH) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.
We've discovered 2 warning signs about Radiant Globaltech Berhad. View them for free.
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Radiant Globaltech Berhad has an accrual ratio of 0.27 for the year to December 2024. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of RM8.01m, a look at free cash flow indicates it actually burnt through RM7.3m in the last year. We saw that FCF was RM4.6m a year ago though, so Radiant Globaltech Berhad has at least been able to generate positive FCF in the past. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Radiant Globaltech Berhad.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Radiant Globaltech Berhad increased the number of shares on issue by 5.8% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out Radiant Globaltech Berhad's historical EPS growth by clicking on this link.
Radiant Globaltech Berhad has improved its profit over the last three years, with an annualized gain of 9.2% in that time. And in the last year the company managed to bump profit up by 4.6%. On the other hand, earnings per share are only up 4.6% in that time. So you can see that the dilution has had a bit of an impact on shareholders.
In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Radiant Globaltech Berhad can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.
As it turns out, Radiant Globaltech Berhad couldn't match its profit with cashflow and its dilution means that earnings per share growth is lagging net income growth. Considering all this we'd argue Radiant Globaltech Berhad's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Radiant Globaltech Berhad at this point in time. To that end, you should learn about the 2 warning signs we've spotted with Radiant Globaltech Berhad (including 1 which is concerning).
Our examination of Radiant Globaltech Berhad has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.
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