There May Be Underlying Issues With The Quality Of Power & Instrumental (Gujarat)'s (NSE:PIGL) Earnings

Despite posting some strong earnings, the market for Power & Instrumental (Gujarat) Limited's (NSE:PIGL) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Check out our latest analysis for Power & Instrumental (Gujarat)

Examining Cashflow Against Power & Instrumental (Gujarat)'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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

Power & Instrumental (Gujarat) has an accrual ratio of 0.21 for the year to September 2024. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of ₹92.5m, a look at free cash flow indicates it actually burnt through ₹110m in the last year. We saw that FCF was ₹98m a year ago though, so Power & Instrumental (Gujarat) has at least been able to generate positive FCF in the past. One positive for Power & Instrumental (Gujarat) 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. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Power & Instrumental (Gujarat).

Our Take On Power & Instrumental (Gujarat)'s Profit Performance

Power & Instrumental (Gujarat) didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Power & Instrumental (Gujarat)'s statutory profits are better than its underlying earnings power. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. 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 want to do dive deeper into Power & Instrumental (Gujarat), you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for Power & Instrumental (Gujarat) (of which 2 are a bit unpleasant!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Power & Instrumental (Gujarat)'s profit. 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. 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.