Ocean Vantage Holdings Berhad's (KLSE:OVH) Profits Appear To Have Quality Issues
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As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. The ratio shows us how much a company's profit exceeds its FCF.
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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Ocean Vantage Holdings Berhad has an accrual ratio of -0.11 for the year to March 2025. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of RM15m, well over the RM10.4m it reported in profit. Ocean Vantage Holdings Berhad's free cash flow improved over the last year, which is generally good to see. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.
Check out our latest analysis for Ocean Vantage Holdings Berhad
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Ocean Vantage Holdings Berhad.
Surprisingly, given Ocean Vantage Holdings Berhad's accrual ratio implied strong cash conversion, its paper profit was actually boosted by RM13m in unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Ocean Vantage Holdings 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.
Ocean Vantage Holdings Berhad's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Based on these factors, we think it's very unlikely that Ocean Vantage Holdings Berhad's statutory profits make it seem much weaker than it is. If you want to do dive deeper into Ocean Vantage Holdings Berhad, you'd also look into what risks it is currently facing. For example, Ocean Vantage Holdings Berhad has 4 warning signs (and 1 which is potentially serious) we think you should know about.
Our examination of Ocean Vantage Holdings Berhad has focussed on certain factors that can make its earnings look better than they are. 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. 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.
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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