Shareholders appeared to be happy with PDS Multinational Fashions Limited's (NSE:PDSMFL) solid earnings report last week. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.
Examining Cashflow Against PDS Multinational Fashions' Earnings
Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Over the twelve months to March 2021, PDS Multinational Fashions recorded an accrual ratio of -0.33. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of ₹3.5b in the last year, which was a lot more than its statutory profit of ₹843.2m. PDS Multinational Fashions' free cash flow improved over the last year, which is generally good to see.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of PDS Multinational Fashions.
Our Take On PDS Multinational Fashions' Profit Performance
Happily for shareholders, PDS Multinational Fashions produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that PDS Multinational Fashions' statutory profit actually understates its earnings potential! Furthermore, it has done a great job growing EPS over the last year. 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. If you'd like to know more about PDS Multinational Fashions as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 3 warning signs for PDS Multinational Fashions and we think they deserve your attention.
This note has only looked at a single factor that sheds light on the nature of PDS Multinational Fashions' 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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This article by Simply Wall St is general in nature. 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.
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