DCM Nouvelle's (NSE:DCMNVL) Promising Earnings May Rest On Soft Foundations

DCM Nouvelle Limited's (NSE:DCMNVL) stock was strong after they reported robust earnings. However, we think that shareholders may be missing some concerning details in the numbers.

Check out our latest analysis for DCM Nouvelle

Examining Cashflow Against DCM Nouvelle'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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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".

DCM Nouvelle has an accrual ratio of 0.22 for the year to September 2021. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In fact, it had free cash flow of ₹499m in the last year, which was a lot less than its statutory profit of ₹1.07b. Notably, DCM Nouvelle had negative free cash flow last year, so the ₹499m it produced this year was a welcome improvement.

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

Our Take On DCM Nouvelle's Profit Performance

DCM Nouvelle'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 DCM Nouvelle's true underlying earnings power is actually less 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Our analysis shows 3 warning signs for DCM Nouvelle (1 is concerning!) and we strongly recommend you look at them before investing.

This note has only looked at a single factor that sheds light on the nature of DCM Nouvelle'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 that insiders are buying to be useful.

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.

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