Ahluwalia Contracts (India)'s (NSE:AHLUCONT) Strong Earnings Are Of Good Quality

When companies post strong earnings, the stock generally performs well, just like Ahluwalia Contracts (India) Limited's (NSE:AHLUCONT) stock has recently. Our analysis found some more factors that we think are good for shareholders.

Check out our latest analysis for Ahluwalia Contracts (India)

Zooming In On Ahluwalia Contracts (India)'s Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Over the twelve months to March 2021, Ahluwalia Contracts (India) recorded an accrual ratio of -0.27. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of ₹2.2b during the period, dwarfing its reported profit of ₹772.0m. Ahluwalia Contracts (India)'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 Ahluwalia Contracts (India)'s Profit Performance

As we discussed above, Ahluwalia Contracts (India)'s accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Ahluwalia Contracts (India)'s statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 20% in the last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 1 warning sign for Ahluwalia Contracts (India) you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Ahluwalia Contracts (India)'s profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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. 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.
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