Yaari Digital Integrated Services (NSE:YAARI) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Yaari Digital Integrated Services Limited's (NSE:YAARI) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

Our analysis indicates that YAARI is potentially undervalued!

A Closer Look At Yaari Digital Integrated Services' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.

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. 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 September 2022, Yaari Digital Integrated Services had an accrual ratio of 0.33. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Over the last year it actually had negative free cash flow of ₹2.2b, in contrast to the aforementioned profit of ₹472.4m. We also note that Yaari Digital Integrated Services' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹2.2b.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Yaari Digital Integrated Services.

Our Take On Yaari Digital Integrated Services' Profit Performance

As we discussed above, we think Yaari Digital Integrated Services' 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 Yaari Digital Integrated Services' underlying earnings power is lower than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 5 warning signs for Yaari Digital Integrated Services (of which 4 are concerning!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Yaari Digital Integrated Services' profit. But there are plenty of other ways to inform your opinion of a company. 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. 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.