Niraj Cement Structurals' (NSE:NIRAJ) Earnings Aren't As Good As They Appear

Even though Niraj Cement Structurals Limited (NSE:NIRAJ) posted strong earnings recently, the stock hasn't reacted in a large way. We looked deeper into the numbers and found that shareholders might be concerned with some underlying weaknesses.

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A Closer Look At Niraj Cement Structurals' 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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to March 2025, Niraj Cement Structurals had an accrual ratio of 0.55. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of ₹150.8m, a look at free cash flow indicates it actually burnt through ₹765m in the last year. We saw that FCF was ₹240m a year ago though, so Niraj Cement Structurals 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. One positive for Niraj Cement Structurals shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. 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 Niraj Cement Structurals.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Niraj Cement Structurals issued 49% more new shares over the last year. That means its earnings are split among a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Niraj Cement Structurals' EPS by clicking here.

How Is Dilution Impacting Niraj Cement Structurals' Earnings Per Share (EPS)?

As you can see above, Niraj Cement Structurals has been growing its net income over the last few years, with an annualized gain of 521% over three years. But EPS was only up 394% per year, in the exact same period. And at a glance the 55% gain in profit over the last year impresses. On the other hand, earnings per share are only up 16% in that time. So you can see that the dilution has had a fairly significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Niraj Cement Structurals 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 that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On Niraj Cement Structurals' Profit Performance

As it turns out, Niraj Cement Structurals couldn't match its profit with cashflow and its dilution means that earnings per share growth is lagging net income growth. For the reasons mentioned above, we think that a perfunctory glance at Niraj Cement Structurals' statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Niraj Cement Structurals as a business, it's important to be aware of any risks it's facing. For example, Niraj Cement Structurals has 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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.