SHH Resources Holdings Berhad's (KLSE:SHH) Strong Earnings Are Of Good Quality

Investors were underwhelmed by the solid earnings posted by SHH Resources Holdings Berhad (KLSE:SHH) recently. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

View our latest analysis for SHH Resources Holdings Berhad

Zooming In On SHH Resources Holdings Berhad'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. 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. The ratio shows us how much a company's profit exceeds its FCF.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

SHH Resources Holdings Berhad has an accrual ratio of -0.10 for the year to December 2022. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of RM15m in the last year, which was a lot more than its statutory profit of RM7.99m. Notably, SHH Resources Holdings Berhad had negative free cash flow last year, so the RM15m it produced this year was a welcome improvement.

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

Our Take On SHH Resources Holdings Berhad's Profit Performance

As we discussed above, SHH Resources Holdings Berhad has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that SHH Resources Holdings Berhad's statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money 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 SHH Resources Holdings Berhad as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that SHH Resources Holdings Berhad has 1 warning sign and it would be unwise to ignore this.

Today we've zoomed in on a single data point to better understand the nature of SHH Resources Holdings Berhad's 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.