Pasupati Acrylon's (NSE:PASUPTAC) Solid Profits Have Weak Fundamentals

Last week's profit announcement from Pasupati Acrylon Limited (NSE:PASUPTAC) was underwhelming for investors, despite headline numbers being robust. We did some digging and found some worrying underlying problems.

Our free stock report includes 3 warning signs investors should be aware of before investing in Pasupati Acrylon. Read for free now.

A Closer Look At Pasupati Acrylon'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.

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. 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.

Over the twelve months to March 2025, Pasupati Acrylon recorded an accrual ratio of 0.44. 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. Even though it reported a profit of ₹353.8m, a look at free cash flow indicates it actually burnt through ₹969m in the last year. We also note that Pasupati Acrylon's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹969m.

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

Our Take On Pasupati Acrylon's Profit Performance

As we discussed above, we think Pasupati Acrylon's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Pasupati Acrylon's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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. So while earnings quality is important, it's equally important to consider the risks facing Pasupati Acrylon at this point in time. To that end, you should learn about the 3 warning signs we've spotted with Pasupati Acrylon (including 1 which is potentially serious).

Today we've zoomed in on a single data point to better understand the nature of Pasupati Acrylon's 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 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.