Vision Infra Equipment Solutions' (NSE:VIESL) Earnings Might Be Weaker Than You Think

Vision Infra Equipment Solutions Limited's (NSE:VIESL) stock performed strongly after the recent earnings report. However, we think that investors should be cautious when interpreting the profit numbers.

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Examining Cashflow Against Vision Infra Equipment Solutions' 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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 March 2025, Vision Infra Equipment Solutions had an accrual ratio of 0.41. 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. Even though it reported a profit of ₹340.5m, a look at free cash flow indicates it actually burnt through ₹1.1b in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₹1.1b, this year, indicates high risk. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Check out our latest analysis for Vision Infra Equipment Solutions

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

The Impact Of Unusual Items On Profit

The fact that the company had unusual items boosting profit by ₹59m, in the last year, probably goes some way to explain why its accrual ratio was so weak. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. If Vision Infra Equipment Solutions doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Vision Infra Equipment Solutions' Profit Performance

Summing up, Vision Infra Equipment Solutions received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue Vision Infra Equipment Solutions' profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Vision Infra Equipment Solutions at this point in time. For example, Vision Infra Equipment Solutions has 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

Our examination of Vision Infra Equipment Solutions 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 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.