We Think Mencast Holdings' (Catalist:5NF) Robust Earnings Are Conservative

Mencast Holdings Ltd.'s (Catalist:5NF) strong earnings report was rewarded with a positive stock price move. We did some digging and found some further encouraging factors that investors will like.

We've discovered 3 warning signs about Mencast Holdings. View them for free.

Zooming In On Mencast Holdings' Earnings

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. 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.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to December 2024, Mencast Holdings had an accrual ratio of -0.18. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of S$16m during the period, dwarfing its reported profit of S$2.42m. Over the last year, Mencast Holdings' free cash flow remained steady. 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 Mencast Holdings

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

How Do Unusual Items Influence Profit?

Mencast Holdings' profit was reduced by unusual items worth S$919k in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Mencast Holdings to produce a higher profit next year, all else being equal.

Our Take On Mencast Holdings' Profit Performance

In conclusion, both Mencast Holdings' accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Based on these factors, we think Mencast Holdings' earnings potential is at least as good as it seems, and maybe even better! So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Our analysis shows 3 warning signs for Mencast Holdings (2 are significant!) and we strongly recommend you look at them before investing.

After our examination into the nature of Mencast Holdings' profit, we've come away optimistic for the company. 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. 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.