There May Be Underlying Issues With The Quality Of Danish Power's (NSE:DANISH) Earnings

Investors were disappointed with Danish Power Limited's (NSE:DANISH) earnings, despite the strong profit numbers. We think that the market might be paying attention to some underlying factors that they find to be concerning.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Examining Cashflow Against Danish Power's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2025, Danish Power had an accrual ratio of 0.62. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of ₹526m, in contrast to the aforementioned profit of ₹666.4m. We also note that Danish Power's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹526m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Danish Power.

Our Take On Danish Power's Profit Performance

As we discussed above, we think Danish Power's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Danish Power's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But at least holders can take some solace from the 22% EPS growth 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Our analysis shows 2 warning signs for Danish Power (1 is a bit concerning!) and we strongly recommend you look at them before investing.

Today we've zoomed in on a single data point to better understand the nature of Danish Power'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. 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 with significant insider holdings to be useful.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.