Vinsys IT Services India's (NSE:VINSYS) Profits Appear To Have Quality Issues

The market shrugged off Vinsys IT Services India Limited's (NSE:VINSYS) solid earnings report. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

Check out our latest analysis for Vinsys IT Services India

Examining Cashflow Against Vinsys IT Services India'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to September 2024, Vinsys IT Services India recorded an accrual ratio of 0.36. Statistically speaking, that's a real negative for future earnings. 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 ₹119m, in contrast to the aforementioned profit of ₹258.3m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₹119m, this year, indicates high risk.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Vinsys IT Services India.

Our Take On Vinsys IT Services India's Profit Performance

As we have made quite clear, we're a bit worried that Vinsys IT Services India didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Vinsys IT Services India's underlying earnings power is lower than its statutory profit. Sadly, its EPS was down over the last twelve months. 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. If you want to do dive deeper into Vinsys IT Services India, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for Vinsys IT Services India (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 Vinsys IT Services India'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 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.