Additional Considerations Required While Assessing Vintage Coffee and Beverages' (NSE:VINCOFE) Strong Earnings

Despite announcing strong earnings, Vintage Coffee and Beverages Limited's (NSE:VINCOFE) stock was sluggish. We did some digging and found some worrying underlying problems.

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A Closer Look At Vintage Coffee and Beverages' 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to March 2025, Vintage Coffee and Beverages recorded an accrual ratio of 0.24. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In the last twelve months it actually had negative free cash flow, with an outflow of ₹347m despite its profit of ₹401.5m, mentioned above. We also note that Vintage Coffee and Beverages' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹347m. Unfortunately for shareholders, the company has also been issuing new shares, diluting 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 Vintage Coffee and Beverages.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, Vintage Coffee and Beverages issued 13% more new shares over the last year. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Vintage Coffee and Beverages' historical EPS growth by clicking on this link.

A Look At The Impact Of Vintage Coffee and Beverages' Dilution On Its Earnings Per Share (EPS)

Vintage Coffee and Beverages was losing money three years ago. The good news is that profit was up 235% in the last twelve months. On the other hand, earnings per share are only up 180% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Vintage Coffee and Beverages shareholders will want to see that EPS figure continue to increase. 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 Vintage Coffee and Beverages' Profit Performance

In conclusion, Vintage Coffee and Beverages has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means its earnings per share growth is weaker than its profit growth. Considering all this we'd argue Vintage Coffee and Beverages' profits probably give an overly generous impression of its sustainable level of profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 2 warning signs for Vintage Coffee and Beverages (of which 1 is concerning!) you should know about.

Our examination of Vintage Coffee and Beverages 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. 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.