Himatsingka Seide's (NSE:HIMATSEIDE) Strong Earnings Are Of Good Quality

Investors were underwhelmed by the solid earnings posted by Himatsingka Seide Limited (NSE:HIMATSEIDE) recently. We did some digging and actually think they are being unnecessarily pessimistic.

Check out our latest analysis for Himatsingka Seide

Examining Cashflow Against Himatsingka Seide's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. The ratio shows us how much a company's profit exceeds its FCF.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Himatsingka Seide has an accrual ratio of -0.11 for the year to September 2023. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of ₹5.1b in the last year, which was a lot more than its statutory profit of ₹824.7m. Himatsingka Seide shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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 Himatsingka Seide's Profit Performance

As we discussed above, Himatsingka Seide has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Himatsingka Seide's statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Himatsingka Seide, and understanding it should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Himatsingka Seide's 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 that insiders are buying.

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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.