Shenghui Cleanness Group Holdings' (HKG:2521) Sluggish Earnings Might Be Just The Beginning Of Its Problems

Shenghui Cleanness Group Holdings Limited's (HKG:2521) stock showed strength, with investors undeterred by its weak earnings report. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Shenghui Cleanness Group Holdings.

See our latest analysis for Shenghui Cleanness Group Holdings

Examining Cashflow Against Shenghui Cleanness Group Holdings' 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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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 June 2024, Shenghui Cleanness Group Holdings recorded an accrual ratio of 0.45. 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. In the last twelve months it actually had negative free cash flow, with an outflow of CN¥58m despite its profit of CN¥22.7m, mentioned above. It's worth noting that Shenghui Cleanness Group Holdings generated positive FCF of CN¥25m a year ago, so at least they've done it in the past.

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

Our Take On Shenghui Cleanness Group Holdings' Profit Performance

As we discussed above, we think Shenghui Cleanness Group Holdings' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Shenghui Cleanness Group Holdings' underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Shenghui Cleanness Group Holdings as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 4 warning signs for Shenghui Cleanness Group Holdings (of which 2 shouldn't be ignored!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Shenghui Cleanness Group Holdings' profit. 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. 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.