Investors Shouldn't Be Too Comfortable With Borana Weaves' (NSE:BORANA) Earnings

Borana Weaves Limited (NSE:BORANA) just reported some strong earnings, and the market reacted accordingly with a healthy uplift in the share price. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

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A Closer Look At Borana Weaves' 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. 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.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2025, Borana Weaves had an accrual ratio of 0.76. 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. Even though it reported a profit of ₹511.6m, a look at free cash flow indicates it actually burnt through ₹1.1b in the last year. We also note that Borana Weaves' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹1.1b.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Borana Weaves.

Our Take On Borana Weaves' Profit Performance

As we discussed above, we think Borana Weaves' 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 Borana Weaves' underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Borana Weaves as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for Borana Weaves you should be mindful of and 1 of them shouldn't be ignored.

Today we've zoomed in on a single data point to better understand the nature of Borana Weaves' 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.

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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.