Lloyds Engineering Works' (NSE:LLOYDSENPP) Earnings Might Be Weaker Than You Think

Lloyds Engineering Works Limited (NSE:LLOYDSENPP) posted some decent earnings, but shareholders didn't react strongly. Our analysis has found some concerning factors which weaken the profit's foundation.

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Examining Cashflow Against Lloyds Engineering Works' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Lloyds Engineering Works has an accrual ratio of 1.04 for the year to September 2025. 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. In the last twelve months it actually had negative free cash flow, with an outflow of ₹6.4b despite its profit of ₹1.36b, mentioned above. We saw that FCF was ₹2.0b a year ago though, so Lloyds Engineering Works has at least been able to generate positive FCF in the past. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings. The good news for shareholders is that Lloyds Engineering Works' accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Lloyds Engineering Works.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Lloyds Engineering Works expanded the number of shares on issue by 14% over the last year. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out Lloyds Engineering Works' historical EPS growth by clicking on this link.

How Is Dilution Impacting Lloyds Engineering Works' Earnings Per Share (EPS)?

Lloyds Engineering Works has improved its profit over the last three years, with an annualized gain of 501% in that time. In comparison, earnings per share only gained 353% over the same period. And at a glance the 40% gain in profit over the last year impresses. On the other hand, earnings per share are only up 32% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Lloyds Engineering Works shareholders will want to see that EPS figure continue to increase. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Lloyds Engineering Works' Profit Performance

In conclusion, Lloyds Engineering Works has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means its earnings per share growth is weaker than its profit growth. For the reasons mentioned above, we think that a perfunctory glance at Lloyds Engineering Works' statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Lloyds Engineering Works at this point in time. Be aware that Lloyds Engineering Works is showing 2 warning signs in our investment analysis and 1 of those is potentially serious...

Our examination of Lloyds Engineering Works has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.