Weak Statutory Earnings May Not Tell The Whole Story For Hiap Seng Industries (SGX:1L2)
A lackluster earnings announcement from Hiap Seng Industries Limited (SGX:1L2) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.
A Closer Look At Hiap Seng Industries' Earnings
One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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.
That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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".
Over the twelve months to March 2026, Hiap Seng Industries recorded an accrual ratio of 0.47. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of S$1.5m, in contrast to the aforementioned profit of S$2.84m. We saw that FCF was S$2.6m a year ago though, so Hiap Seng Industries has at least been able to generate positive FCF in the past.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hiap Seng Industries.
Our Take On Hiap Seng Industries' Profit Performance
As we discussed above, we think Hiap Seng Industries' earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Hiap Seng Industries' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. 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 want to do dive deeper into Hiap Seng Industries, you'd also look into what risks it is currently facing. Be aware that Hiap Seng Industries is showing 4 warning signs in our investment analysis and 1 of those is a bit unpleasant...
Today we've zoomed in on a single data point to better understand the nature of Hiap Seng Industries' profit. But there are plenty of other ways to inform your opinion of a company. 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.