We Think Human Health Holdings' (HKG:1419) Healthy Earnings Might Be Conservative

The market seemed underwhelmed by last week's earnings announcement from Human Health Holdings Limited (HKG:1419) despite the healthy numbers. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.

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A Closer Look At Human Health Holdings' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. The ratio shows us how much a company's profit exceeds its FCF.

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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to June 2025, Human Health Holdings had an accrual ratio of -0.19. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of HK$91m, well over the HK$26.3m it reported in profit. Notably, Human Health Holdings had negative free cash flow last year, so the HK$91m it produced this year was a welcome improvement. 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.

View our latest analysis for Human Health Holdings

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

How Do Unusual Items Influence Profit?

Human Health Holdings' profit was reduced by unusual items worth HK$8.2m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Human Health Holdings to produce a higher profit next year, all else being equal.

Our Take On Human Health Holdings' Profit Performance

In conclusion, both Human Health Holdings' accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. After considering all this, we reckon Human Health Holdings' statutory profit probably understates its earnings potential! If you want to do dive deeper into Human Health Holdings, you'd also look into what risks it is currently facing. For example - Human Health Holdings has 3 warning signs we think you should be aware of.

Our examination of Human Health Holdings has focussed on certain factors that can make its earnings look better than they are. And it has passed with flying colours. 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.