Forcas Studio (NSE:FORCAS) Strong Profits May Be Masking Some Underlying Issues

Forcas Studio Limited's (NSE:FORCAS) robust recent earnings didn't do much to move the stock. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

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Examining Cashflow Against Forcas Studio's 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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Forcas Studio has an accrual ratio of 0.35 for the year to September 2025. 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. Even though it reported a profit of ₹115.3m, a look at free cash flow indicates it actually burnt through ₹201m in the last year. We also note that Forcas Studio's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹201m.

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

Our Take On Forcas Studio's Profit Performance

As we discussed above, we think Forcas Studio's 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 Forcas Studio's 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 Forcas Studio as a business, it's important to be aware of any risks it's facing. For example, we've found that Forcas Studio has 3 warning signs (2 can't be ignored!) that deserve your attention before going any further with your analysis.

This note has only looked at a single factor that sheds light on the nature of Forcas Studio'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 with significant insider holdings 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.