Transteel Seating Technologies (NSE:TRANSTEEL) Strong Profits May Be Masking Some Underlying Issues

Transteel Seating Technologies Limited (NSE:TRANSTEEL) just released a solid earnings report, and the stock displayed some strength. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.

See our latest analysis for Transteel Seating Technologies

Examining Cashflow Against Transteel Seating 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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 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.

For the year to March 2024, Transteel Seating Technologies had an accrual ratio of 0.66. 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. In the last twelve months it actually had negative free cash flow, with an outflow of ₹422m despite its profit of ₹111.1m, mentioned above. We also note that Transteel Seating Technologies' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹422m.

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

Our Take On Transteel Seating Technologies' Profit Performance

As we have made quite clear, we're a bit worried that Transteel Seating Technologies didn't back up the last year's profit with free cashflow. For this reason, we think that Transteel Seating Technologies' 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. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. When we did our research, we found 4 warning signs for Transteel Seating Technologies (2 can't be ignored!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of Transteel Seating 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.