Emerald Tyre Manufacturers' (NSE:ETML) Profits Appear To Have Quality Issues

The recent earnings posted by Emerald Tyre Manufacturers Limited (NSE:ETML) were solid, but the stock didn't move as much as we expected. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

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A Closer Look At Emerald Tyre Manufacturers' 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. 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Emerald Tyre Manufacturers has an accrual ratio of 0.34 for the year to September 2025. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Even though it reported a profit of ₹116.1m, a look at free cash flow indicates it actually burnt through ₹535m in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₹535m, this year, indicates high risk.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Emerald Tyre Manufacturers.

Our Take On Emerald Tyre Manufacturers' Profit Performance

As we discussed above, we think Emerald Tyre Manufacturers' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Emerald Tyre Manufacturers' underlying earnings power is lower than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 18% over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Emerald Tyre Manufacturers as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 4 warning signs we've spotted with Emerald Tyre Manufacturers (including 2 which can't be ignored).

This note has only looked at a single factor that sheds light on the nature of Emerald Tyre Manufacturers' 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.