Why Uzma Berhad's Earnings Growth May Be Misleading Investors

Investors often equate rising earnings with corporate health, but Uzma Berhad’s recent financial performance reveals a more nuanced—and concerning—story. While the company reported a 6.8–15% increase in profits over the past year, its earnings quality and shareholder returns are undermined by two critical issues: weak cash flow generation and aggressive share dilution. These factors suggest that the company’s reported growth may not reflect its true operational strength or long-term sustainability.

The Accrual Ratio: A Warning Signal

The accrual ratio, a metric that compares statutory profits to free cash flow, is a key indicator of earnings quality. For Uzma Berhad, this ratio has remained alarmingly high. In the year ending December 2024, the accrual ratio stood at 0.35, meaning statutory profits of RM41.7 million far exceeded free cash flow, which turned negative by RM366 million [2]. By June 2025, the ratio had slightly improved to 0.21, but the company still reported negative free cash flow of RM223 million despite a RM53.5 million profit [5]. This persistent gap signals that earnings are not supported by robust cash generation, raising questions about the sustainability of reported growth. High accrual ratios often correlate with aggressive accounting practices or weak demand, both of which could erode investor confidence over time [3].

Negative Free Cash Flow: A Structural Weakness

Free cash flow is the lifeblood of a company, enabling reinvestment, debt repayment, and shareholder returns. Yet Uzma Berhad has posted negative free cash flow for two consecutive years. In FY 2024, the company burned through RM366 million in free cash flow, and this trend continued in FY 2025 with another RM223 million shortfall [3][5]. Such persistent outflows suggest operational inefficiencies, heavy capital expenditures, or declining margins. For investors, this is a red flag: without positive cash flow, the company’s ability to fund growth or reward shareholders is constrained. Moreover, negative free cash flow can force reliance on debt, increasing financial risk in an uncertain economic environment.

EPS Growth: Diluted by Share Issuance

Even Uzma Berhad’s earnings per share (EPS) growth appears misleading. While basic EPS rose from RM0.084 in FY 2024 to RM0.12 in FY 2025 [1], this growth was significantly diluted by a 13–14% increase in the number of shares outstanding [3]. The diluted EPS of RM0.1204 [2] underscores the erosion of value for existing shareholders. Projections indicate that EPS growth will remain modest—just 1.5% annually—despite a 4% revenue growth forecast [5]. This disconnect highlights the dilution’s drag on shareholder returns. When earnings are spread across more shares, the true economic benefit to existing investors diminishes, even if top-line revenue appears to grow.

The Bigger Picture: Misaligned Fundamentals

The combination of weak cash flow and EPS dilution paints a picture of earnings growth that is structurally fragile. While Uzma Berhad’s net income increased by 24% in FY 2025 [4], this metric alone does not account for the cash outflows or the dilution of ownership. Investors may be tempted to focus on headline profits, but the underlying fundamentals—negative free cash flow and declining EPS per share—suggest that the company’s growth is not translating into value creation. This misalignment between accounting profits and cash realities could lead to a reassessment of the stock’s valuation, particularly if market conditions shift or earnings quality deteriorates further.

Conclusion: Proceed with Caution

Uzma Berhad’s earnings growth may appear attractive at first glance, but a closer examination reveals significant risks. The high accrual ratio, negative free cash flow, and EPS dilution collectively indicate that the company’s financial health is weaker than its reported profits suggest. For investors, this underscores the importance of looking beyond net income to assess cash flow sustainability and ownership structure. In an era where earnings quality is paramount, Uzma Berhad’s current trajectory may not justify the optimism surrounding its stock.

Source:
[1] Uzma Berhad Full Year 2025 Earnings: EPS - Yahoo Finance [https://finance.yahoo.com/news/uzma-berhad-full-2025-earnings-220913676.html]
[2] Uzma Berhad Reports Earnings Results for the Fourth Quarter and Full Year Ended June 30, 2025 [https://www.marketscreener.com/news/uzma-berhad-reports-earnings-results-for-the-fourth-quarter-and-full-year-ended-june-30-2025-ce7c50d9de8af321]
[3] Concerns Surrounding Uzma Berhad's (KLSE:UZMA [https://finance.yahoo.com/news/concerns-surrounding-uzma-berhads-klse-231353414.html]
[4] Uzma Berhad Full Year 2025 Earnings: EPS: RM0.12 (vs ... [https://simplywall.st/stocks/my/energy/klse-uzma/uzma-berhad-shares/news/uzma-berhad-full-year-2025-earnings-eps-rm012-vs-rm0084-in-f]
[5] Uzma Berhad Future Growth [https://simplywall.st/stocks/my/energy/klse-uzma/uzma-berhad-shares/future]