Butterfly Gandhimathi Appliances' (NSE:BUTTERFLY) Performance Is Even Better Than Its Earnings Suggest

Butterfly Gandhimathi Appliances Limited's (NSE:BUTTERFLY) strong earnings report was rewarded with a positive stock price move. Our analysis found some more factors that we think are good for shareholders.

See our latest analysis for Butterfly Gandhimathi Appliances

A Closer Look At Butterfly Gandhimathi Appliances' 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. 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".

Butterfly Gandhimathi Appliances has an accrual ratio of -0.58 for the year to March 2021. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of ₹2.0b, well over the ₹361.6m it reported in profit. Butterfly Gandhimathi Appliances' free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Butterfly Gandhimathi Appliances.

Our Take On Butterfly Gandhimathi Appliances' Profit Performance

Happily for shareholders, Butterfly Gandhimathi Appliances produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Butterfly Gandhimathi Appliances' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Better yet, its EPS are growing strongly, which is nice to see. 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. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Butterfly Gandhimathi Appliances.

This note has only looked at a single factor that sheds light on the nature of Butterfly Gandhimathi Appliances' 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 that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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