Additional Considerations Required While Assessing Lagnam Spintex's (NSE:LAGNAM) Strong Earnings

Lagnam Spintex Limited's (NSE:LAGNAM) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for Lagnam Spintex

Zooming In On Lagnam Spintex'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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.

Lagnam Spintex has an accrual ratio of 0.51 for the year to March 2024. As a general rule, that bodes poorly for future profitability. 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 ₹1.8b, in contrast to the aforementioned profit of ₹145.7m. We also note that Lagnam Spintex's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹1.8b.

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

Our Take On Lagnam Spintex's Profit Performance

As we discussed above, we think Lagnam Spintex'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 Lagnam Spintex's underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For instance, we've identified 4 warning signs for Lagnam Spintex (2 can't be ignored) you should be familiar with.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com