Lakshya Powertech (NSE:LAKSHYA) Strong Profits May Be Masking Some Underlying Issues

Lakshya Powertech Limited's (NSE:LAKSHYA) healthy profit numbers didn't contain any surprises for investors. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

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Zooming In On Lakshya Powertech's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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 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 March 2025, Lakshya Powertech had 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. Even though it reported a profit of ₹158.3m, a look at free cash flow indicates it actually burnt through ₹401m in the last year. We also note that Lakshya Powertech's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹401m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Lakshya Powertech.

Our Take On Lakshya Powertech's Profit Performance

As we discussed above, we think Lakshya Powertech's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Lakshya Powertech'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. 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 Lakshya Powertech as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 2 warning signs for Lakshya Powertech (of which 1 makes us a bit uncomfortable!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Lakshya Powertech'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. 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.