Earnings Troubles May Signal Larger Issues for Apollo Pipes (NSE:APOLLOPIPE) Shareholders

A lackluster earnings announcement from Apollo Pipes Limited (NSE:APOLLOPIPE) last week didn't sink the stock price. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

Our free stock report includes 2 warning signs investors should be aware of before investing in Apollo Pipes. Read for free now.

A Closer Look At Apollo Pipes' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to March 2025, Apollo Pipes had an accrual ratio of 0.21. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of ₹326.5m, a look at free cash flow indicates it actually burnt through ₹1.1b in the last year. It's worth noting that Apollo Pipes generated positive FCF of ₹261m a year ago, so at least they've done it in the past. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

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.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Apollo Pipes increased the number of shares on issue by 6.5% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Apollo Pipes' historical EPS growth by clicking on this link.

How Is Dilution Impacting Apollo Pipes' Earnings Per Share (EPS)?

Unfortunately, Apollo Pipes' profit is down 34% per year over three years. And even focusing only on the last twelve months, we see profit is down 23%. Sadly, earnings per share fell further, down a full 29% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If Apollo Pipes' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Apollo Pipes' Profit Performance

As it turns out, Apollo Pipes couldn't match its profit with cashflow and its dilution means that shareholders own less of the company than the did before (unless they bought more shares). Considering all this we'd argue Apollo Pipes' profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Apollo Pipes at this point in time. To that end, you should learn about the 2 warning signs we've spotted with Apollo Pipes (including 1 which is a bit unpleasant).

Our examination of Apollo Pipes has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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 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.