Saakshi Medtech and Panels' (NSE:SAAKSHI) Problems Go Beyond Weak Profit

Last week's earnings announcement from Saakshi Medtech and Panels Limited (NSE:SAAKSHI) was disappointing to investors, with a sluggish profit figure. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.

View our latest analysis for Saakshi Medtech and Panels

A Closer Look At Saakshi Medtech and Panels' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Saakshi Medtech and Panels has an accrual ratio of 0.39 for the year to September 2024. As a general rule, that bodes poorly for future profitability. 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 ₹271m despite its profit of ₹92.2m, mentioned above. We also note that Saakshi Medtech and Panels' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹271m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Saakshi Medtech and Panels.

Our Take On Saakshi Medtech and Panels' Profit Performance

As we discussed above, we think Saakshi Medtech and Panels' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Saakshi Medtech and Panels' underlying earnings power is lower than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 17% over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 2 warning signs for Saakshi Medtech and Panels (of which 1 doesn't sit too well with us!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Saakshi Medtech and Panels' profit. 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.