Shadman Cotton Mills Limited (SHCM) returned to profit in the audited year ended June 30, 2026, but the recovery is much less straightforward than the PKR 30.82 million bottom line suggests. Revenue rose strongly and gross margin moved back into positive territory. Yet manufacturing remained idle, textile and trading activities still lost money before other income, and the final profit depended on a large deferred-tax credit.
The result is best viewed as an improvement in liquidity and trading activity rather than a completed operational turnaround. Rental income from investment property, reversal of an old credit-loss allowance and tax accounting all supported earnings. The auditor issued a qualified opinion on four balance-sheet and legal matters and separately highlighted material uncertainty over going concern.
Results at a glance
- Reporting basis: audited standalone financial statements for the year ended June 30, 2026, presented in Pakistani rupees, with FY2025 comparatives.
- Net sales: PKR 737.63 million, up 44.6% from PKR 509.96 million.
- Gross profit: PKR 2.36 million versus a PKR 19.67 million gross loss; gross margin improved to 0.3% from negative 3.9%.
- Calculated operating subtotal before other income: a PKR 32.02 million loss versus a PKR 67.63 million loss.
- Reported operating profit: PKR 72.03 million versus PKR 13.92 million, after PKR 104.05 million of other income.
- Profit before levies and taxation: PKR 3.40 million versus a PKR 28.93 million loss.
- Loss before income tax after levies: PKR 5.82 million versus PKR 35.31 million.
- Profit after tax: PKR 30.82 million versus a PKR 16.57 million loss; EPS was PKR 1.75 versus a loss per share of PKR 0.94.
- Dividend: none recommended because the board considers the financial position weak.
AlphaGen model scores
The following are AlphaGen model outputs, not figures reported by SHCM. They describe measured business performance and relative positioning; they are not valuation conclusions or investment recommendations.
- Alpha QoQ Score: 99.48
- TTM Performance Score: 99.41
- 3Y Business Perf Score: 53.36
- Sector Leadership Score: 87.6124
The near-100 quarterly and trailing scores are consistent with the latest-year earnings swing and a particularly stronger closing period. The more moderate three-year score fits SHCM’s unstable multi-year profitability. These signals need to be interpreted alongside the deferred-tax credit, idle spinning capacity, rental dependence and qualified audit opinion.
What improved
Net sales increased by PKR 227.67 million, or 44.6%. Gross profit moved from a PKR 19.67 million loss to PKR 2.36 million, improving gross margin by roughly 4.2 percentage points. Selling and distribution expense fell to PKR 3.86 million from PKR 12.50 million, mainly because export-related freight and forwarding costs disappeared. Administrative expense also declined to PKR 30.53 million from PKR 35.47 million.
The sales mix changed radically. Gross staple-fibre trading income rose to PKR 859.68 million from PKR 311.39 million, while gross apparel sales fell to PKR 8.04 million from PKR 219.22 million. FY2025 included PKR 193.45 million of exports; FY2026 exports were zero. This means the turnover increase came from domestic staple-fibre trading, not an expansion in apparel or export volumes.
That distinction matters because the directors attribute growth broadly to the apparel division and alternate options, whereas the detailed revenue note shows apparel contraction and a shift toward trading. The filing does not disclose unit volumes or a price/mix bridge, so it is not possible to separate higher trading volumes from higher prices. The article therefore limits the causal conclusion to the documented change in revenue composition.
Liquidity also improved. Cash generated from operations rose to PKR 63.70 million from PKR 16.10 million, and net operating cash flow turned positive at PKR 31.19 million from negative PKR 5.67 million. Cash and bank balances increased to PKR 45.22 million from PKR 27.37 million.
Reported debt fell as well. Long-term finance including its current maturity declined to PKR 225.51 million from PKR 264.73 million, while short-term director borrowings fell to PKR 88.59 million from PKR 154.86 million. On the face of the accounts, total debt therefore decreased by about PKR 105.50 million to PKR 314.09 million.
What actually produced the profit
The textile and trading operations did not generate the reported PKR 72.03 million operating profit on their own. Gross profit of PKR 2.36 million was more than absorbed by PKR 34.39 million of selling and administrative expenses. That leaves a calculated PKR 32.02 million operating loss before other income—better than the prior-year PKR 67.63 million deficit, but still negative.
Other income of PKR 104.05 million turned that subtotal into reported operating profit. Rental income contributed PKR 75.64 million, or nearly 73% of other income. Returns on term deposits, bank balances and gas security deposits contributed about PKR 11.16 million, while reversal of expected credit losses on old doubtful trade debts added PKR 11.07 million. Rental income is economically relevant and may recur, but it is property income rather than evidence of textile manufacturing profitability.
The company also recorded PKR 65.45 million of other expenses. The two largest items were a PKR 31.23 million loss on disposal of operating fixed assets and a PKR 25.41 million impairment loss on fixed assets. After these charges and PKR 3.18 million of finance cost, profit before levies and taxation was only PKR 3.40 million.
Minimum and final levies of PKR 9.22 million then produced a PKR 5.82 million loss before income tax. A PKR 36.64 million net tax credit converted that loss into PKR 30.82 million of after-tax profit. The credit consisted principally of a PKR 40.08 million deferred-tax reversal, partly offset by net current-tax expense. The company’s own going-concern note and the auditor both state that FY2026 profit arose primarily from the deferred-tax impact.
This accounting bridge is the central earnings-quality issue. The profit is valid as reported, but it is not a clean measure of recurring trading performance. Without the deferred-tax credit, SHCM would have remained loss-making after levies.
Cash flow and balance sheet
The positive cash flow needs its own qualification. Before working-capital movements, operating profit translated into only PKR 10.27 million of operating cash. A PKR 53.44 million working-capital release lifted cash generated from operations to PKR 63.70 million. The largest contributors were the complete release of PKR 44.11 million of stock-in-trade and a PKR 9.71 million reduction in stores and spares, while trade receivables absorbed PKR 20.32 million.
This is helpful for liquidity but not indefinitely repeatable: year-end stock-in-trade was nil. Investing activities generated PKR 54.82 million, supported by PKR 75.64 million of rental cash and PKR 64.69 million of asset-disposal proceeds, while capital expenditure used PKR 73.31 million. Financing activities used PKR 68.16 million through long- and short-term loan repayments. The result was a PKR 17.85 million increase in cash.
Current assets rose slightly to PKR 289.20 million, while current liabilities fell to PKR 305.21 million. The current ratio improved to approximately 0.95 times from 0.81 times, but current liabilities still exceeded current assets by PKR 16.00 million. Current assets also include PKR 51.80 million of tax refunds, PKR 60.60 million of trade debts and PKR 121.75 million of short-term investments, so immediately available cash is materially lower than the headline current-asset total.
Reported equity was PKR 870.88 million, but its composition is important. It includes PKR 711.66 million of revaluation surplus and PKR 247.34 million of interest-free directors’ loans classified as equity because repayment is at the company’s discretion. Against these sit accumulated losses of PKR 317.70 million. Excluding revaluation surplus and director-loan support, ordinary share capital plus share premium less accumulated losses remains negative.
Audit qualifications and going concern
The auditor issued a qualified opinion rather than an unmodified opinion. First, it could not verify the PKR 18.32 million Sindh infrastructure-cess liability, the related court filing or the supporting bank guarantees. Second, it judged a PKR 16.20 million LESCO receivable—past due since 2011—to be impaired even though no loss allowance was recorded.
Third, the auditor did not receive bank confirmation for the PKR 28.54 million decreed Meezan Bank ijarah balance, which remains under appeal and execution proceedings. Fourth, it said the restructured Bank of Punjab loan should have been measured at amortized cost under IFRS 9. The company carried the loan at PKR 225.51 million; the auditor calculated PKR 81.82 million and said liabilities and accumulated losses were consequently overstated by PKR 143.70 million.
The fourth qualification would mechanically improve reported liabilities and accumulated losses if corrected, but its absence still signals weak accounting compliance around a major financing agreement. It should not be treated as a free economic gain: cash repayments remain governed by the bank settlement, including quarterly installments and a conditional markup waiver.
Separately, the auditor highlighted material uncertainty over going concern. SHCM had PKR 317.70 million of accumulated losses, a PKR 16.00 million current-liability excess and a profit driven mainly by deferred tax. Management’s mitigation is to pursue new markets and rely on directors to inject funds for working capital and debt obligations.
What weakened or needs attention
Manufacturing remains inactive. SHCM had 39,336 installed spindles but reported no spindles worked, no shifts and no yarn production in FY2026 or FY2025. The company has 76 sewing machines in its apparel division, but apparel revenue collapsed and export sales disappeared. The workforce also fell to 39 employees at year-end from 54, with the average headcount declining to 47 from 108.
The business is therefore functioning mainly through domestic staple-fibre trading, property rental and asset management rather than its historic spinning operation. That model can generate cash, but it deserves different expectations from a functioning textile manufacturer. Gross margin of only 0.3% leaves little room for pricing errors, credit losses or operating cost shocks.
Related-party support remains substantial. Directors provided PKR 17.34 million of new short-term loans during the year, repaid PKR 46.28 million, and still had PKR 88.59 million classified as current borrowings plus PKR 247.34 million classified within equity. Dependence on discretionary director funding is consistent with the going-concern mitigation, but it also shows that the balance sheet is not yet self-sustaining.
What to monitor next
- Recurring operations: whether domestic staple-fibre trading can keep sales elevated while producing more than a 0.3% gross margin.
- Apparel and exports: evidence of renewed orders, utilization of the 76 sewing machines and recovery from zero export sales.
- Rental durability: occupancy, lease terms and cash collection from the PKR 103.22 million investment property, since rent is now a central earnings source.
- Tax normalization: earnings after the PKR 40.08 million deferred-tax reversal no longer supports the bottom line.
- Working-capital quality: collection of PKR 60.60 million of trade debts, including the disputed LESCO balance, after inventory has already been reduced to nil.
- Debt compliance: Bank of Punjab installment performance, the conditional markup waiver and correction of IFRS 9 measurement.
- Going concern: whether cash generation and new markets reduce dependence on further director funding.
Bottom line
FY2026 is a meaningful improvement for SHCM. Revenue rose, gross losses were eliminated, operating cash flow turned positive, cash increased and reported debt declined. The company also benefited from recurring property rent and lower operating expenses.
But the core textile-and-trading subtotal remained loss-making before other income, no yarn was produced, apparel and exports contracted, and the PKR 30.82 million net profit required a PKR 36.64 million tax credit. Combined with four audit qualifications and a material going-concern uncertainty, that makes the turnaround fragile. The next result needs to show recurring pre-tax profit from trading or manufacturing—not another tax-led rescue of the bottom line.
Primary sources
SHCM company announcements — Pakistan Stock Exchange