Anup Engineering's (NSE:ANUP) Solid Earnings May Rest On Weak Foundations

The stock price didn't jump after The Anup Engineering Limited (NSE:ANUP) posted decent earnings last week. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

We've discovered 2 warning signs about Anup Engineering. View them for free.

A Closer Look At Anup Engineering's 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Anup Engineering has an accrual ratio of 0.33 for the year to March 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. In the last twelve months it actually had negative free cash flow, with an outflow of ₹518m despite its profit of ₹1.18b, mentioned above. It's worth noting that Anup Engineering generated positive FCF of ₹1.3b a year ago, so at least they've done it in the past. One positive for Anup Engineering shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

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 Anup Engineering's Profit Performance

As we discussed above, we think Anup Engineering's 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 Anup Engineering's underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. If you want to do dive deeper into Anup Engineering, you'd also look into what risks it is currently facing. To that end, you should learn about the 2 warning signs we've spotted with Anup Engineering (including 1 which doesn't sit too well with us).

This note has only looked at a single factor that sheds light on the nature of Anup Engineering's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with high insider ownership.

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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.