Steed Oriental (Holdings)'s (HKG:8277) Earnings Are Built On Soft Foundations

Investors appear disappointed with Steed Oriental (Holdings) Company Limited's (HKG:8277) recent earnings, despite the decent statutory profit number. We think that they may be worried about something else, so we did some analysis and found that investors have noticed some soft numbers underlying the profit.

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Examining Cashflow Against Steed Oriental (Holdings)'s 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. 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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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 September 2025, Steed Oriental (Holdings) had an accrual ratio of 0.32. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. To wit, it produced free cash flow of HK$17m during the period, falling well short of its reported profit of HK$45.6m. Notably, Steed Oriental (Holdings) had negative free cash flow last year, so the HK$17m 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. One positive for Steed Oriental (Holdings) shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

See our latest analysis for Steed Oriental (Holdings)

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

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Steed Oriental (Holdings)'s profit was boosted by unusual items worth HK$62m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Steed Oriental (Holdings)'s positive unusual items were quite significant relative to its profit in the year to September 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 Steed Oriental (Holdings)'s Profit Performance

Steed Oriental (Holdings) had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Steed Oriental (Holdings)'s profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Steed Oriental (Holdings) as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 5 warning signs we've spotted with Steed Oriental (Holdings) (including 2 which are significant).

Our examination of Steed Oriental (Holdings) 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 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.