Impressive Earnings May Not Tell The Whole Story For Transformers and Rectifiers (India) (NSE:TARIL)

Transformers and Rectifiers (India) Limited (NSE:TARIL) just reported some strong earnings, and the market reacted accordingly with a healthy uplift in the share price. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

We've discovered 2 warning signs about Transformers and Rectifiers (India). View them for free.

A Closer Look At Transformers and Rectifiers (India)'s Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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 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. 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 March 2025, Transformers and Rectifiers (India) had an accrual ratio of 0.30. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. In the last twelve months it actually had negative free cash flow, with an outflow of ₹782m despite its profit of ₹2.14b, mentioned above. It's worth noting that Transformers and Rectifiers (India) generated positive FCF of ₹133m a year ago, so at least they've done it in the past. 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.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Transformers and Rectifiers (India) expanded the number of shares on issue by 5.3% over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out Transformers and Rectifiers (India)'s historical EPS growth by clicking on this link.

A Look At The Impact Of Transformers and Rectifiers (India)'s Dilution On Its Earnings Per Share (EPS)

Transformers and Rectifiers (India) has improved its profit over the last three years, with an annualized gain of 1,432% in that time. But EPS was only up 1,267% per year, in the exact same period. And the 382% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 345% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Transformers and Rectifiers (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 the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Transformers and Rectifiers (India)'s Profit Performance

As it turns out, Transformers and Rectifiers (India) 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 Transformers and Rectifiers (India)'s statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Transformers and Rectifiers (India), you'd also look into what risks it is currently facing. While conducting our analysis, we found that Transformers and Rectifiers (India) has 2 warning signs and it would be unwise to ignore them.

Our examination of Transformers and Rectifiers (India) has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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.