We Think Bharat Electronics' (NSE:BEL) Robust Earnings Are Conservative

Bharat Electronics Limited (NSE:BEL) just reported healthy earnings but the stock price didn't move much. We think that investors have missed some encouraging factors underlying the profit figures.

See our latest analysis for Bharat Electronics

Zooming In On Bharat Electronics' 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. 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. 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 September 2021, Bharat Electronics recorded an accrual ratio of -0.41. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of ₹53b in the last year, which was a lot more than its statutory profit of ₹22.9b. Bharat Electronics' 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 Bharat Electronics' Profit Performance

Happily for shareholders, Bharat Electronics produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Bharat Electronics' statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 39% per year 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. If you want to do dive deeper into Bharat Electronics, you'd also look into what risks it is currently facing. For example - Bharat Electronics has 1 warning sign we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Bharat Electronics' 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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.

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