We Like SH Group (Holdings)'s (HKG:1637) Earnings For More Than Just Statutory Profit

The recent earnings posted by SH Group (Holdings) Limited (HKG:1637) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

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Examining Cashflow Against SH Group (Holdings)'s Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to September 2025, SH Group (Holdings) recorded an accrual ratio of -0.60. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of HK$78m during the period, dwarfing its reported profit of HK$10.2m. SH Group (Holdings)'s free cash flow improved over the last year, which is generally good to see. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

View our latest analysis for SH Group (Holdings)

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

How Do Unusual Items Influence Profit?

Surprisingly, given SH Group (Holdings)'s accrual ratio implied strong cash conversion, its paper profit was actually boosted by HK$3.9m 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. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. SH Group (Holdings) had a rather significant contribution from unusual items relative to its profit to September 2025. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On SH Group (Holdings)'s Profit Performance

In conclusion, SH Group (Holdings)'s accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Based on these factors, it's hard to tell if SH Group (Holdings)'s profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into SH Group (Holdings), you'd also look into what risks it is currently facing. Case in point: We've spotted 3 warning signs for SH Group (Holdings) you should be mindful of and 1 of these is potentially serious.

Our examination of SH Group (Holdings) 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. 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.

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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.