We Think That There Are Issues Underlying Balu Forge Industries' (NSE:BALUFORGE) Earnings

Balu Forge Industries Limited's (NSE:BALUFORGE) 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 Balu Forge Industries' 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.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Balu Forge Industries has an accrual ratio of 0.53 for the year to September 2025. As a general rule, that bodes poorly for future profitability. 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 ₹2.9b, in contrast to the aforementioned profit of ₹2.45b. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₹2.9b, 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 Balu Forge Industries.

Our Take On Balu Forge Industries' Profit Performance

As we discussed above, we think Balu Forge Industries' 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 Balu Forge Industries' underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate 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. 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 Balu Forge Industries you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Balu Forge Industries' 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 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.