Robust Earnings May Not Tell The Whole Story For Indian Railway Catering & Tourism (NSE:IRCTC)

Despite posting some strong earnings, the market for Indian Railway Catering & Tourism Corporation Limited's (NSE:IRCTC) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.

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. 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. 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 2022, Indian Railway Catering & Tourism had an accrual ratio of 1.38. That means it didn't generate anywhere near enough free cash flow to match its profit. As a general rule, that bodes poorly for future profitability. To wit, it produced free cash flow of ₹4.7b during the period, falling well short of its reported profit of ₹6.64b. At this point we should mention that Indian Railway Catering & Tourism did manage to increase its free cash flow in the last twelve months

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Indian Railway Catering & Tourism.

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 on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Every company has risks, and we've spotted 3 warning signs for Indian Railway Catering & Tourism (of which 1 is significant!) you should know about.

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. 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 that insiders are buying 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.