Refex Industries (NSE:REFEX) Is Posting Solid Earnings, But It Is Not All Good News

Refex Industries Limited's (NSE:REFEX) solid earnings report last week was underwhelming to investors. We did some digging and found some worrying factors that they might be paying attention to.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

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

Refex Industries has an accrual ratio of 0.75 for the year to March 2025. 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 ₹1.59b, a look at free cash flow indicates it actually burnt through ₹4.2b in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₹4.2b, this year, indicates high risk. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

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

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Refex Industries issued 12% 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. Check out Refex Industries' historical EPS growth by clicking on this link.

How Is Dilution Impacting Refex Industries' Earnings Per Share (EPS)?

Refex Industries has improved its profit over the last three years, with an annualized gain of 250% in that time. In comparison, earnings per share only gained 199% over the same period. And at a glance the 69% gain in profit over the last year impresses. On the other hand, earnings per share are only up 52% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Refex Industries shareholders will want to see that EPS figure continue to increase. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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 Refex Industries' Profit Performance

In conclusion, Refex Industries 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 Refex Industries' statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Refex Industries as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 1 warning sign for Refex Industries and we think they deserve your attention.

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 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.