Additional Considerations Required While Assessing Jyoti CNC Automation's (NSE:JYOTICNC) Strong Earnings

Unsurprisingly, Jyoti CNC Automation Limited's (NSE:JYOTICNC) stock price was strong on the back of its healthy earnings report. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

Check out our latest analysis for Jyoti CNC Automation

Examining Cashflow Against Jyoti CNC Automation's 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.

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.

For the year to September 2024, Jyoti CNC Automation had an accrual ratio of 0.39. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of ₹2.74b, a look at free cash flow indicates it actually burnt through ₹2.7b in the last year. We also note that Jyoti CNC Automation's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹2.7b.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jyoti CNC Automation.

Our Take On Jyoti CNC Automation's Profit Performance

As we have made quite clear, we're a bit worried that Jyoti CNC Automation didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Jyoti CNC Automation's underlying earnings power is lower than its statutory profit. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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. If you'd like to know more about Jyoti CNC Automation as a business, it's important to be aware of any risks it's facing. For example - Jyoti CNC Automation has 1 warning sign we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Jyoti CNC Automation'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.

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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.