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Sheng Siong Group Ltd's (SGX:OV8) solid earnings announcement recently didn't do much to the stock price. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.
A Closer Look At Sheng Siong Group's Earnings
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.
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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Sheng Siong Group has an accrual ratio of -0.36 for the year to December 2024. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of S$201m in the last year, which was a lot more than its statutory profit of S$137.5m. Sheng Siong Group's free cash flow improved over the last year, which is generally good to see.
That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
Our Take On Sheng Siong Group's Profit Performance
Happily for shareholders, Sheng Siong Group produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Sheng Siong Group's statutory profit actually understates its earnings potential! And it's also good to see that its earnings per share have improved a bit over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into Sheng Siong Group, you'd also look into what risks it is currently facing. Case in point: We've spotted 1 warning sign for Sheng Siong Group you should be aware of.