Jyoti CNC Automation's (NSE:JYOTICNC) Earnings Are Weaker Than They Seem

Despite posting some strong earnings, the market for Jyoti CNC Automation Limited's (NSE:JYOTICNC) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

See our latest analysis for Jyoti CNC Automation

Examining Cashflow Against Jyoti CNC Automation'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. The ratio shows us how much a company's profit exceeds its FCF.

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 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 March 2024, Jyoti CNC Automation recorded an accrual ratio of 0.29. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Even though it reported a profit of ₹1.51b, a look at free cash flow indicates it actually burnt through ₹1.6b 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 ₹1.6b.

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

Jyoti CNC Automation's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that Jyoti CNC Automation's statutory profits are better than its underlying earnings power. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over 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. If you want to do dive deeper into Jyoti CNC Automation, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for Jyoti CNC Automation and you'll want to know about this.

This note has only looked at a single factor that sheds light on the nature of Jyoti CNC Automation's 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 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.