Why NEXG Berhad's (KLSE:NEXG) Profitability May Be Misleading Investors

Investors often equate reported profits with a company’s financial health, but a closer examination of earnings quality—specifically through cash flow and accruals—reveals critical insights that statutory profits alone cannot convey. For NEXG Berhad (KLSE:NEXG), the disconnect between its reported earnings and cash flow dynamics raises questions about the sustainability of its profitability. This analysis explores how NEXG’s financial metrics compare to cautionary cases like Pantech Global Berhad, emphasizing the risks of over-reliance on statutory profits.

Earnings Quality: Beyond the Bottom Line

Earnings quality is a measure of how well a company’s reported profits align with its actual cash generation. A key tool for evaluating this is the accrual ratio, which compares a company’s operating cash flow to its net income. A negative accrual ratio (where cash flow exceeds profit) typically signals strong earnings quality, as it indicates that profits are supported by tangible cash inflows rather than accounting adjustments.

According to a report by Yahoo Finance, NEXG Berhad recorded an accrual ratio of -0.12 for the year to December 2024, meaning its free cash flow (FCF) of RM146 million significantly outpaced its statutory profit of RM110.3 million [1]. This represents a marked improvement from the previous year, when the company faced negative free cash flow [1]. Such a shift suggests that NEXG’s earnings are increasingly backed by operational cash generation, a positive sign for long-term sustainability.

However, this optimism must be tempered with scrutiny. While NEXG’s 2025 annual report highlights robust operating cash flow of RM96.56 million and levered free cash flow of RM83.51 million [2], the absence of detailed disclosures about non-recurring gains in its 2025 financial statements leaves room for uncertainty. Investors should remain cautious, as even companies with strong cash flow metrics can mask risks through one-time accounting adjustments.

A Cautionary Tale: Pantech Global’s Earnings Volatility

The case of Pantech Global Berhad (KLSE:PGLOBAL) serves as a stark reminder of how non-recurring gains can distort earnings quality. In May 2025, Pantech reported a profit of RM57.7 million, driven by a RM52 million boost from unusual items [3]. Despite this, the company generated negative free cash flow of RM86 million, resulting in an accrual ratio of 0.34—a clear indicator of earnings inflation [3]. This mismatch between reported profits and cash flow highlights the dangers of relying on non-operating income to drive earnings growth.

NEXG’s negative accrual ratio (-0.12) contrasts sharply with Pantech’s positive ratio (0.34), suggesting that NEXG’s earnings are more aligned with cash flow. Yet, the absence of explicit disclosures about non-recurring gains in NEXG’s 2025 annual report [2] means investors cannot rule out the possibility of similar accounting practices in future periods. The company’s upcoming earnings report on December 2, 2025, may provide clarity, but until then, prudence is warranted [4].

The Risks of Over-Reliance on Statutory Profits

Statutory profits can be misleading if they are not corroborated by cash flow metrics. For instance, NEXG’s 2025 annual report notes significant financing activities, including RM73.5 million in loan proceeds and RM83.2 million in repayments [2]. While these figures reflect active capital management, they also underscore the company’s reliance on external financing—a factor that could amplify risks during periods of economic stress.

Moreover, the absence of detailed footnotes on non-recurring gains in NEXG’s 2025 report [2] contrasts with Pantech’s transparent disclosure of RM52 million in unusual items [3]. This lack of transparency could obscure the true drivers of NEXG’s earnings growth, making it difficult for investors to assess sustainability.

Conclusion: A Call for Prudent Analysis

NEXG Berhad’s improved free cash flow and negative accrual ratio suggest stronger earnings quality compared to peers like Pantech Global. However, the absence of detailed disclosures about non-recurring gains and the company’s reliance on financing activities highlight the need for cautious interpretation. Investors should prioritize cash flow metrics over statutory profits and await NEXG’s December 2025 earnings report for clarity on the sustainability of its growth.

In an era where accounting practices can obscure financial realities, a rigorous focus on cash flow and accruals remains essential for discerning value from illusion.

Source:
[1] Yahoo Finance, "We Think NEXG Berhad's (KLSE:DSONIC) Profit Is Only A..." [https://finance.yahoo.com/news/think-nexg-berhads-klse-dsonic-233810780.html]
[2] NexG Berhad Annual Report 2025 [https://www.insage.com.my/interactiveAR/NEXG/interactiveAR2025/176/]
[3] Yahoo Finance, "Pantech Global Berhad's (KLSE:PGLOBAL) Earnings Might..." [https://finance.yahoo.com/news/pantech-global-berhads-klse-pglobal-220631393.html]
[4] TradingView, "NEXG Stock Price and Chart" [https://www.tradingview.com/symbols/MYX-NEXG/]