We Think Superhouse's (NSE:SUPERHOUSE) Solid Earnings Are Understated

The market seemed underwhelmed by last week's earnings announcement from Superhouse Limited (NSE:SUPERHOUSE) despite the healthy numbers. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

Check out our latest analysis for Superhouse

Zooming In On Superhouse's 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. 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.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Superhouse has an accrual ratio of -0.10 for the year to March 2021. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of ₹763m in the last year, which was a lot more than its statutory profit of ₹279.8m. Superhouse's 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 Superhouse.

Our Take On Superhouse's Profit Performance

Superhouse's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Superhouse's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 59% per year over the last three years. 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 Superhouse at this point in time. At Simply Wall St, we found 3 warning signs for Superhouse and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Superhouse's profit. But there are plenty of other ways to inform your opinion of a company. 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. 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 that insiders are buying to be useful.

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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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