Tex Cycle Technology (M) Berhad's (KLSE:TEXCYCL) Problems Go Beyond Weak Profit
The subdued market reaction suggests that Tex Cycle Technology (M) Berhad's (KLSE:TEXCYCL) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.
We've discovered 3 warning signs about Tex Cycle Technology (M) Berhad. View them for free.
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. The ratio shows us how much a company's profit exceeds its FCF.
Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Over the twelve months to March 2025, Tex Cycle Technology (M) Berhad recorded an accrual ratio of 0.21. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of RM12.1m, a look at free cash flow indicates it actually burnt through RM25m in the last year. We also note that Tex Cycle Technology (M) Berhad's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of RM25m. 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 Tex Cycle Technology (M) Berhad.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Tex Cycle Technology (M) Berhad expanded the number of shares on issue by 9.9% over the last year. That means its earnings are split among a greater number of shares. 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 Tex Cycle Technology (M) Berhad's historical EPS growth by clicking on this link.
As you can see above, Tex Cycle Technology (M) Berhad has been growing its net income over the last few years, with an annualized gain of 131% over three years. Net income was down 40% over the last twelve months. But the EPS result was even worse, with the company recording a decline of 43%. And so, you can see quite clearly that dilution is influencing shareholder earnings.
In the long term, if Tex Cycle Technology (M) Berhad's earnings per share can increase, then the share price should too. 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, Tex Cycle Technology (M) Berhad couldn't match its profit with cashflow and its dilution means that shareholders own less of the company than the did before (unless they bought more shares). For the reasons mentioned above, we think that a perfunctory glance at Tex Cycle Technology (M) Berhad's statutory profits might make it look better than it really is on an underlying level. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Our analysis shows 3 warning signs for Tex Cycle Technology (M) Berhad (1 is significant!) and we strongly recommend you look at these before investing.
Our examination of Tex Cycle Technology (M) 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 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.
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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