07-03-2025
PDZ Holdings Bhd (KLSE:PDZ) Strong Profits May Be Masking Some Underlying Issues
The recent earnings posted by PDZ Holdings Bhd (KLSE:PDZ) were solid, but the stock didn't move as much as we expected. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.
See our latest analysis for PDZ Holdings Bhd
Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
PDZ Holdings Bhd has an accrual ratio of 2.27 for the year to December 2024. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of RM8.38m, a look at free cash flow indicates it actually burnt through RM21m in the last year. We also note that PDZ Holdings Bhd's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of RM21m.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of PDZ Holdings Bhd.
As we discussed above, we think PDZ Holdings Bhd's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that PDZ Holdings Bhd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing PDZ Holdings Bhd at this point in time. Our analysis shows 4 warning signs for PDZ Holdings Bhd (3 shouldn't be ignored!) and we strongly recommend you look at them before investing.
Today we've zoomed in on a single data point to better understand the nature of PDZ Holdings Bhd's profit. 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) 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.
