We Think That There Are Issues Underlying Tara Chand Logistic Solutions' (NSE:TARACHAND) Earnings

Unsurprisingly, Tara Chand Logistic Solutions Limited's (NSE:TARACHAND) stock price was strong on the back of its healthy earnings report. However, we think that shareholders may be missing some concerning details in the numbers.

See our latest analysis for Tara Chand Logistic Solutions

A Closer Look At Tara Chand Logistic Solutions' 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. 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.

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.

For the year to September 2024, Tara Chand Logistic Solutions had an accrual ratio of 0.27. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. In the last twelve months it actually had negative free cash flow, with an outflow of ₹214m despite its profit of ₹214.2m, mentioned above. We also note that Tara Chand Logistic Solutions' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹214m. 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 Tara Chand Logistic Solutions.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. In fact, Tara Chand Logistic Solutions increased the number of shares on issue by 11% over the last twelve months by issuing new shares. 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. You can see a chart of Tara Chand Logistic Solutions' EPS by clicking here.

A Look At The Impact Of Tara Chand Logistic Solutions' Dilution On Its Earnings Per Share (EPS)

Tara Chand Logistic Solutions has improved its profit over the last three years, with an annualized gain of 354% in that time. In comparison, earnings per share only gained 313% over the same period. And at a glance the 77% gain in profit over the last year impresses. But in comparison, EPS only increased by 63% 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 Tara Chand Logistic Solutions 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 Tara Chand Logistic Solutions' Profit Performance

As it turns out, Tara Chand Logistic Solutions couldn't match its profit with cashflow and its dilution means that earnings per share growth is lagging net income growth. For the reasons mentioned above, we think that a perfunctory glance at Tara Chand Logistic Solutions' statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Tara Chand Logistic Solutions, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 5 warning signs for Tara Chand Logistic Solutions (of which 1 is a bit unpleasant!) you should know about.

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. Some people consider a high return on equity to be a good sign of a quality business. 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.