Iris Clothings' (NSE:IRISDOREME) Promising Earnings May Rest On Soft Foundations

Iris Clothings Limited (NSE:IRISDOREME) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

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A Closer Look At Iris Clothings' 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). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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

Iris Clothings has an accrual ratio of 0.25 for the year to September 2025. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of ₹136.0m, a look at free cash flow indicates it actually burnt through ₹178m in the last year. We saw that FCF was ₹56m a year ago though, so Iris Clothings has at least been able to generate positive FCF in the past.

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

Our Take On Iris Clothings' Profit Performance

Iris Clothings didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Iris Clothings' true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 30% per annum growth in EPS for the last three. 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. So while earnings quality is important, it's equally important to consider the risks facing Iris Clothings at this point in time. Case in point: We've spotted 2 warning signs for Iris Clothings you should be mindful of and 1 of them shouldn't be ignored.

This note has only looked at a single factor that sheds light on the nature of Iris Clothings' 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. 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.