Superland Group Holdings Limited (HKG: 368) the stock was not badly affected by its recent poor earnings figures. Our analysis suggests that they may be missing some worrying details underlying the earnings numbers.
See our latest analysis for Superland Group Holdings
Focus on the profits of Superland Group Holdings
Many investors have not heard of the cash flow adjustment ratio, but it’s actually a useful measure of the extent to which a company’s profit is supported by Free Cash Flow (FCF) over a given period. To get the accrual ratio, we first subtract FCF from earnings for a period and then divide that number by the average operating assets for the period. The ratio shows us by how much a company’s profit exceeds its FCF.
Therefore, a negative accumulation ratio is positive for the company and a positive accumulation ratio is negative. This is not to say that we should be worried about a positive accumulation ratio, but it should be noted where the accumulation ratio is rather high. Notably, some academic evidence suggests that a high accrual ratio is a bad sign for short-term profits, in general.
Superland Group Holdings has an accumulation ratio of 0.43 for the year through June 2021. Statistically speaking, this is really negative for future earnings. And indeed, during the period, the company produced no free cash flow. In the past twelve months he had in fact negative free cash flow, with an outflow of HK $ 130 million despite its profit of HK $ 19.3 million, mentioned above. We also note that Superland Group Holdings’ free cash flow was also negative last year, so we were able to understand if shareholders were embarrassed by its HK $ 130 million outflow. However, that’s not all there is to consider. The accruals ratio reflects the impact of unusual items on statutory profit, at least in part.
To note: we always recommend that investors check the strength of the balance sheet. Click here to access our analysis of Superland Group Holdings’ balance sheet.
How do unusual items influence profit?
Considering the build-up ratio, it’s not too surprising that Superland Group Holdings’ profit has been boosted by unusual items worth HK $ 17 million over the past twelve months. While we like to see profits increase, we tend to be a bit more cautious when unusual things have made a big contribution. When we analyzed the vast majority of listed companies around the world, we found that important unusual items often do not repeat themselves. And, after all, that’s exactly what accounting terminology implies. We can see that the positive unusual items of Superland Group Holdings were quite large compared to its profit until June 2021. Accordingly, we can assume that the unusual items make its statutory profit significantly higher than it would otherwise be. .
Our perspective on the earnings performance of Superland Group Holdings
In summary, Superland Group Holdings received a good boost to take advantage of unusual items, but was unable to match its paper profit with free cash flow. For all of the above reasons, we believe that at first glance, Superland Group Holdings’ statutory earnings could be considered low quality, as they are likely to give investors an overly positive impression of the company. With that in mind, we wouldn’t consider investing in a stock unless we have a thorough understanding of the risks. For example, Superland Group Holdings has 5 warning signs (and 3 which are a bit disturbing) we think you should know about.
Our review of Superland Group Holdings focused on certain factors that can make its profits better than they are. And, on that basis, we are somewhat skeptical. But there are plenty of other ways to tell your opinion about a business. For example, many people see a high return on equity as an indication of a favorable business economy, while others like to “follow the money” and look for stocks that insiders are buying. So you might want to see this free a set of companies with a high return on equity, or that list of stocks that insiders buy.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
If you decide to trade Superland Group Holdings, use the cheapest platform * which is ranked # 1 overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, currencies, bonds and funds in 135 markets, all from one integrated account.Promoted