Robust Earnings May Not Tell The Whole Story For Shigan Quantum Technologies (NSE:SHIGAN)

Shigan Quantum Technologies Limited's (NSE:SHIGAN) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

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A Closer Look At Shigan Quantum Technologies' 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to June 2022, Shigan Quantum Technologies had an accrual ratio of 0.58. Statistically speaking, that's a real negative for future earnings. 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 ₹176m, in contrast to the aforementioned profit of ₹109.7m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₹176m, 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 Shigan Quantum Technologies.

Our Take On Shigan Quantum Technologies' Profit Performance

As we have made quite clear, we're a bit worried that Shigan Quantum Technologies didn't back up the last year's profit with free cashflow. For this reason, we think that Shigan Quantum Technologies' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For instance, we've identified 3 warning signs for Shigan Quantum Technologies (2 make us uncomfortable) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Shigan Quantum Technologies' 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. 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.