Concerns Surrounding Finolex Cables' (NSE:FINCABLES) Performance

The market shrugged off Finolex Cables Limited's (NSE:FINCABLES) solid earnings report. We think that investors might be worried about some concerning underlying factors.

Check out our latest analysis for Finolex Cables

A Closer Look At Finolex Cables' 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. 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Finolex Cables has an accrual ratio of 0.25 for the year to September 2024. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. In fact, it had free cash flow of ₹1.4b in the last year, which was a lot less than its statutory profit of ₹6.99b. Finolex Cables shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down over the last twelve months. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

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.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Finolex Cables' profit was boosted by unusual items worth ₹1.3b in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. If Finolex Cables doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Finolex Cables' Profit Performance

Finolex Cables had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Finolex Cables' profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Finolex Cables, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for Finolex Cables and you'll want to know about this.

Our examination of Finolex Cables 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 is always more to discover if you are capable of focussing your mind on minutiae. 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.