We Think That There Are Issues Underlying Vishnu Prakash R Punglia's (NSE:VPRPL) Earnings

Vishnu Prakash R Punglia Limited's (NSE:VPRPL) stock was strong after they recently reported robust earnings. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.

View our latest analysis for Vishnu Prakash R Punglia

Examining Cashflow Against Vishnu Prakash R Punglia's 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. 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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to March 2024, Vishnu Prakash R Punglia recorded an accrual ratio of 0.62. 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. Over the last year it actually had negative free cash flow of ₹3.7b, in contrast to the aforementioned profit of ₹1.22b. We also note that Vishnu Prakash R Punglia's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹3.7b.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Vishnu Prakash R Punglia.

Our Take On Vishnu Prakash R Punglia's Profit Performance

As we discussed above, we think Vishnu Prakash R Punglia's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Vishnu Prakash R Punglia's underlying earnings power is lower than its statutory profit. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 2 warning signs for Vishnu Prakash R Punglia you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Vishnu Prakash R Punglia's profit. 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.