Investors Shouldn't Be Too Comfortable With Waaree Renewable Technologies' (NSE:WAAREERTL) Earnings

Waaree Renewable Technologies Limited's (NSE:WAAREERTL) stock was strong after they recently reported robust earnings. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

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Zooming In On Waaree Renewable Technologies' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Waaree Renewable Technologies has an accrual ratio of 0.71 for the year to September 2025. Ergo, its free cash flow is significantly weaker than its profit. Statistically speaking, that's a real negative for future earnings. To wit, it produced free cash flow of ₹1.4b during the period, falling well short of its reported profit of ₹3.50b. Waaree Renewable Technologies' free cash flow actually declined over the last year, but it may bounce back next year, since free cash flow is often more volatile than accounting profits.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Waaree Renewable Technologies.

Our Take On Waaree Renewable Technologies' Profit Performance

As we discussed above, we think Waaree Renewable Technologies' 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 Waaree Renewable Technologies' 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. If you'd like to know more about Waaree Renewable Technologies as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 1 warning sign for Waaree Renewable Technologies you should know about.

Today we've zoomed in on a single data point to better understand the nature of Waaree Renewable Technologies' 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. 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.