Despite announcing strong earnings, UCrest Berhad's (KLSE:UCREST) stock was sluggish. We did some digging and found some worrying underlying problems.

Check out our latest analysis for UCrest Berhad

A Closer Look At UCrest Berhad's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. The ratio shows us how much a company's profit exceeds its FCF.

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".

UCrest Berhad has an accrual ratio of 0.45 for the year to May 2024. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of RM4.93m, a look at free cash flow indicates it actually burnt through RM3.4m in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of RM3.4m, this year, indicates high risk.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of UCrest Berhad.

Our Take On UCrest Berhad's Profit Performance

As we discussed above, we think UCrest Berhad's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that UCrest Berhad's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about UCrest Berhad as a business, it's important to be aware of any risks it's facing. Our analysis shows 4 warning signs for UCrest Berhad (1 is potentially serious!) and we strongly recommend you look at these before investing.