Rapid Synergy Berhad (KLSE:RAPID) Shareholders Should Be Cautious Despite Solid Earnings

Yahoo

29-05-2025

Investors appear disappointed with Rapid Synergy Berhad's (KLSE:RAPID) recent earnings, despite the decent statutory profit number. We think that they may be worried about something else, so we did some analysis and found that investors have noticed some soft numbers underlying the profit.
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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. This ratio tells us how much of a company's profit is not backed by free cashflow.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
For the year to March 2025, Rapid Synergy Berhad had an accrual ratio of 0.26. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of RM48m, in contrast to the aforementioned profit of RM20.9m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of RM48m, this year, indicates high risk. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.
See our latest analysis for Rapid Synergy Berhad
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Rapid Synergy Berhad.
The fact that the company had unusual items boosting profit by RM32m, in the last year, probably goes some way to explain why its accrual ratio was so weak. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Rapid Synergy Berhad had a rather significant contribution from unusual items relative to its profit to March 2025. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.
Rapid Synergy Berhad had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Rapid Synergy Berhad's profits probably give an overly generous impression of its sustainable level of profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For instance, we've identified 4 warning signs for Rapid Synergy Berhad (1 can't be ignored) you should be familiar with.
Our examination of Rapid Synergy 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. 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.
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