We Think You Should Be Aware Of Some Concerning Factors In Gujarat Apollo Industries' (NSE:GUJAPOLLO) Earnings

The recent earnings posted by Gujarat Apollo Industries Limited (NSE:GUJAPOLLO) were solid, but the stock didn't move as much as we expected. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

See our latest analysis for Gujarat Apollo Industries

Examining Cashflow Against Gujarat Apollo Industries' 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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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.

Over the twelve months to March 2021, Gujarat Apollo Industries recorded 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. In the last twelve months it actually had negative free cash flow, with an outflow of ₹2.2b despite its profit of ₹454.7m, mentioned above. We saw that FCF was ₹94m a year ago though, so Gujarat Apollo Industries has at least been able to generate positive FCF in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Gujarat Apollo Industries.

Our Take On Gujarat Apollo Industries' Profit Performance

As we have made quite clear, we're a bit worried that Gujarat Apollo Industries didn't back up the last year's profit with free cashflow. For this reason, we think that Gujarat Apollo Industries' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Nonetheless, it's still worth noting that its earnings per share have grown at 48% over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Gujarat Apollo Industries as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 4 warning signs we've spotted with Gujarat Apollo Industries (including 1 which shouldn't be ignored).

This note has only looked at a single factor that sheds light on the nature of Gujarat Apollo 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. 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.

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This article by Simply Wall St is general in nature. 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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