Some Investors May Be Willing To Look Past DRB-HICOM Berhad’s (KLSE:DRBHCOM) Soft Earnings

DRB-HICOM Berhad’s (KLSE:DRBHCOM) earnings announcement last week didn’t impress shareholders. Despite the soft profit numbers, our analysis has optimistic about the overall quality of the income statement.

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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. 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. To quote a 2014 paper by Lewellen and Resutek, “firms with higher accruals tend to be less profitable in the future”.

DRB-HICOM Berhad has an accrual ratio of -0.14 for the year to September 2025. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of RM1.8b in the last year, which was a lot more than its statutory profit of RM14.0m. DRB-HICOM Berhad’s free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

DRB-HICOM Berhad’s accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think DRB-HICOM Berhad’s earnings potential is at least as good as it seems, and maybe even better! On the other hand, its EPS actually shrunk in the last twelve months. 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. With this in mind, we wouldn’t consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we’ve identified 2 warning signs with DRB-HICOM Berhad, and understanding these should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of DRB-HICOM Berhad’s profit. But there are plenty of other ways to inform your opinion of a company. 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.

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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.