We Think IFB Industries' (NSE:IFBIND) Profit Is Only A Baseline For What They Can Achieve

Even though IFB Industries Limited's (NSE:IFBIND) recent earnings release was robust, the market didn't seem to notice. Our analysis suggests that investors might be missing some promising details.

View our latest analysis for IFB Industries

A Closer Look At IFB Industries' 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. 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.

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.

IFB Industries has an accrual ratio of -0.23 for the year to March 2021. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of ₹2.0b in the last year, which was a lot more than its statutory profit of ₹632.4m. Given that IFB Industries had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₹2.0b would seem to be a step in the right direction.

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

Our Take On IFB Industries' Profit Performance

Happily for shareholders, IFB Industries produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think IFB Industries' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over the 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. 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. At Simply Wall St, we found 1 warning sign for IFB Industries and we think they deserve your attention.

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