SUTL Enterprise Limited’s (SGX:BHU) healthy profit numbers didn’t contain any surprises for investors. However the statutory profit number doesn’t tell the whole story, and we have found some factors which might be of concern to shareholders.
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. This ratio tells us how much of a company’s profit is not backed by free cashflow.
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 it’s not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, “firms with higher accruals tend to be less profitable in the future”.
Over the twelve months to December 2024, SUTL Enterprise recorded an accrual ratio of 0.72. That means it didn’t generate anywhere near enough free cash flow to match its profit. Statistically speaking, that’s a real negative for future earnings. In fact, it had free cash flow of S$5.3m in the last year, which was a lot less than its statutory profit of S$8.53m. SUTL Enterprise shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down over the last twelve months. The good news for shareholders is that SUTL Enterprise’s accrual ratio was much better last year, so this year’s poor reading might simply be a case of a short term mismatch between profit and FCF. As a result, some shareholders may be looking for stronger cash conversion in the current year.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of SUTL Enterprise.
As we discussed above, we think SUTL Enterprise’s earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that SUTL Enterprise’s underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 68% per annum growth in EPS for the last three. 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. If you’d like to know more about SUTL Enterprise as a business, it’s important to be aware of any risks it’s facing. Every company has risks, and we’ve spotted 2 warning signs for SUTL Enterprise (of which 1 is potentially serious!) you should know about.
