Hitachi Energy India's (NSE:POWERINDIA) Performance Is Even Better Than Its Earnings Suggest

The subdued stock price reaction suggests that Hitachi Energy India Limited's (NSE:POWERINDIA) strong earnings didn't offer any surprises. Our analysis suggests that investors might be missing some promising details.

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A Closer Look At Hitachi Energy India'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. 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 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".

Over the twelve months to March 2025, Hitachi Energy India recorded an accrual ratio of -1.10. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of ₹14b during the period, dwarfing its reported profit of ₹3.84b. Hitachi Energy India shareholders are no doubt pleased that free cash flow improved over the last twelve months. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Hitachi Energy India increased the number of shares on issue by 5.2% over the last twelve months by issuing new shares. As a result, its net income is now split between 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. Check out Hitachi Energy India's historical EPS growth by clicking on this link.

How Is Dilution Impacting Hitachi Energy India's Earnings Per Share (EPS)?

As you can see above, Hitachi Energy India has been growing its net income over the last few years, with an annualized gain of 134% over three years. And the 134% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 134% over the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Hitachi Energy India can grow EPS persistently. 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 Hitachi Energy India's Profit Performance

At the end of the day, Hitachi Energy India is diluting shareholders which will dampen earnings per share growth, but its accrual ratio showed it can back up its profits with free cash flow. Considering all the aforementioned, we'd venture that Hitachi Energy India's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. Given that we think the earnings are a decent guide to the business, it might be worth looking at its share price. Given that Hitachi Energy India has managed to grow its earnings, it may well have an above average P/E ratio.Click here to find out!

Our examination of Hitachi Energy India has focussed on certain factors that can make its earnings look better than they are. 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.