There May Be Underlying Issues With The Quality Of Shankar Lal Rampal Dye-Chem's (NSE:SRD) Earnings

Shankar Lal Rampal Dye-Chem Limited's (NSE:SRD) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

Our free stock report includes 2 warning signs investors should be aware of before investing in Shankar Lal Rampal Dye-Chem. Read for free now.

A Closer Look At Shankar Lal Rampal Dye-Chem's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to March 2025, Shankar Lal Rampal Dye-Chem recorded an accrual ratio of 0.21. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Over the last year it actually had negative free cash flow of ₹126m, in contrast to the aforementioned profit of ₹113.9m. It's worth noting that Shankar Lal Rampal Dye-Chem generated positive FCF of ₹55m a year ago, so at least they've done it in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shankar Lal Rampal Dye-Chem.

Our Take On Shankar Lal Rampal Dye-Chem's Profit Performance

Shankar Lal Rampal Dye-Chem didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Shankar Lal Rampal Dye-Chem's true underlying earnings power is actually less than its statutory profit. The good news is that, its earnings per share increased by 75% in the last year. 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. If you want to do dive deeper into Shankar Lal Rampal Dye-Chem, you'd also look into what risks it is currently facing. To help with this, we've discovered 2 warning signs (1 is a bit unpleasant!) that you ought to be aware of before buying any shares in Shankar Lal Rampal Dye-Chem.

Today we've zoomed in on a single data point to better understand the nature of Shankar Lal Rampal Dye-Chem'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. 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.