Unity Group Holdings International's (HKG:1539) Performance Raises Some Questions

We didn't see Unity Group Holdings International Limited's (HKG:1539) stock surge when it reported robust earnings recently. We decided to have a deeper look, and we believe that investors might be worried about several concerning factors that we found.

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A Closer Look At Unity Group Holdings International's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to March 2025, Unity Group Holdings International had an accrual ratio of 0.38. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of HK$35.5m, a look at free cash flow indicates it actually burnt through HK$68m in the last year. We also note that Unity Group Holdings International's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of HK$68m. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

See our latest analysis for Unity Group Holdings International

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

The Impact Of Unusual Items On Profit

Given the accrual ratio, it's not overly surprising that Unity Group Holdings International's profit was boosted by unusual items worth HK$23m in the last twelve months. 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. Which is hardly surprising, given the name. We can see that Unity Group Holdings International's positive unusual items were quite significant relative to its profit in the year to March 2025. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Unity Group Holdings International's Profit Performance

Unity Group Holdings International had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Unity Group Holdings International's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Unity Group Holdings International, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for Unity Group Holdings International and you'll want to know about it.

Our examination of Unity Group Holdings International has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.