Borosil's (NSE:BOROLTD) Weak Earnings May Only Reveal A Part Of The Whole Picture

The market wasn't impressed with the soft earnings from Borosil Limited (NSE:BOROLTD) recently. Our analysis has found some reasons to be concerned, beyond the weak headline numbers.

See our latest analysis for Borosil

Zooming In On Borosil'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). 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Borosil has an accrual ratio of 0.26 for the year to March 2024. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Over the last year it actually had negative free cash flow of ₹1.3b, in contrast to the aforementioned profit of ₹658.7m. We also note that Borosil's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹1.3b.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Borosil's Profit Performance

Borosil's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Therefore, it seems possible to us that Borosil's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 56% per annum growth in EPS for the last three. 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 want to do dive deeper into Borosil, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 1 warning sign with Borosil, and understanding it should be part of your investment process.

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