Indian Railway Catering & Tourism's (NSE:IRCTC) Profits May Not Reveal Underlying Issues

The market shrugged off Indian Railway Catering & Tourism Corporation Limited's (NSE:IRCTC) solid earnings report. We think that investors might be worried about some concerning underlying factors.

See our latest analysis for Indian Railway Catering & Tourism

Zooming In On Indian Railway Catering & Tourism'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). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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".

Over the twelve months to March 2024, Indian Railway Catering & Tourism recorded an accrual ratio of 0.63. Ergo, its free cash flow is significantly weaker than its profit. Statistically speaking, that's a real negative for future earnings. In fact, it had free cash flow of ₹6.4b in the last year, which was a lot less than its statutory profit of ₹11.1b. At this point we should mention that Indian Railway Catering & Tourism did manage to increase its free cash flow in the last twelve months

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Indian Railway Catering & Tourism's Profit Performance

As we discussed above, we think Indian Railway Catering & Tourism's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Indian Railway Catering & Tourism'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. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For instance, we've identified 2 warning signs for Indian Railway Catering & Tourism (1 can't be ignored) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Indian Railway Catering & Tourism's profit. 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.