Udayshivakumar Infra's (NSE:USK) Shareholders May Want To Dig Deeper Than Statutory Profit

The recent earnings posted by Udayshivakumar Infra Limited (NSE:USK) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

Check out our latest analysis for Udayshivakumar Infra

Zooming In On Udayshivakumar Infra's 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 2024, Udayshivakumar Infra had an accrual ratio of 0.51. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of ₹301.3m, a look at free cash flow indicates it actually burnt through ₹519m in the last year. We saw that FCF was ₹29m a year ago though, so Udayshivakumar Infra has at least been able to generate positive FCF in the past.

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

Our Take On Udayshivakumar Infra's Profit Performance

As we have made quite clear, we're a bit worried that Udayshivakumar Infra didn't back up the last year's profit with free cashflow. For this reason, we think that Udayshivakumar Infra's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the good news is that its EPS growth over the last three years has been very impressive. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Udayshivakumar Infra at this point in time. To that end, you should learn about the 2 warning signs we've spotted with Udayshivakumar Infra (including 1 which doesn't sit too well with us).

Today we've zoomed in on a single data point to better understand the nature of Udayshivakumar Infra's profit. 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. 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.