Kay Cee Energy & Infra's (NSE:KCEIL) Earnings Are Of Questionable Quality

Last week's profit announcement from Kay Cee Energy & Infra Limited (NSE:KCEIL) was underwhelming for investors, despite headline numbers being robust. We think that the market might be paying attention to some underlying factors that they find to be concerning.

View our latest analysis for Kay Cee Energy & Infra

A Closer Look At Kay Cee Energy & Infra'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. 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.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2024, Kay Cee Energy & Infra had an accrual ratio of 0.33. 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. Over the last year it actually had negative free cash flow of ₹124m, in contrast to the aforementioned profit of ₹87.6m. We also note that Kay Cee Energy & Infra's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹124m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Kay Cee Energy & Infra.

Our Take On Kay Cee Energy & Infra's Profit Performance

As we have made quite clear, we're a bit worried that Kay Cee Energy & Infra didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Kay Cee Energy & Infra's underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Kay Cee Energy & Infra as a business, it's important to be aware of any risks it's facing. For example, we've found that Kay Cee Energy & Infra has 3 warning signs (2 can't be ignored!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of Kay Cee Energy & Infra's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.