We Think Pashupati Cotspin's (NSE:PASHUPATI) Profit Is Only A Baseline For What They Can Achieve

Investors were underwhelmed by the solid earnings posted by Pashupati Cotspin Limited (NSE:PASHUPATI) recently. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

See our latest analysis for Pashupati Cotspin

Zooming In On Pashupati Cotspin's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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.

For the year to September 2024, Pashupati Cotspin had an accrual ratio of -0.11. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of ₹392m during the period, dwarfing its reported profit of ₹134.0m. Pashupati Cotspin shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On Pashupati Cotspin's Profit Performance

As we discussed above, Pashupati Cotspin has perfectly satisfactory free cash flow relative to profit. Because of this, we think Pashupati Cotspin's earnings potential is at least as good as it seems, and maybe even better! Furthermore, it has done a great job growing EPS over the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Pashupati Cotspin, you'd also look into what risks it is currently facing. While conducting our analysis, we found that Pashupati Cotspin has 2 warning signs and it would be unwise to ignore them.

Today we've zoomed in on a single data point to better understand the nature of Pashupati Cotspin'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.