Weak Statutory Earnings May Not Tell The Whole Story For Kewal Kiran Clothing (NSE:KKCL)

Kewal Kiran Clothing Limited's (NSE:KKCL) stock showed strength, with investors undeterred by its weak earnings report. While shareholders may be willing to overlook soft profit numbers, we believe that they should also be taking into account some other factors which may be cause for concern.

We've discovered 2 warning signs about Kewal Kiran Clothing. View them for free.

Examining Cashflow Against Kewal Kiran Clothing'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to March 2025, Kewal Kiran Clothing had an accrual ratio of 0.39. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of ₹716m, in contrast to the aforementioned profit of ₹1.49b. We saw that FCF was ₹1.3b a year ago though, so Kewal Kiran Clothing has at least been able to generate positive FCF in the past.

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 Kewal Kiran Clothing's Profit Performance

As we discussed above, we think Kewal Kiran Clothing's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Kewal Kiran Clothing's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. If you'd like to know more about Kewal Kiran Clothing as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for Kewal Kiran Clothing you should be mindful of and 1 of these is potentially serious.

This note has only looked at a single factor that sheds light on the nature of Kewal Kiran Clothing's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with high insider ownership.

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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.