Shareholders In Swaraj Suiting (NSE:SWARAJ) Should Look Beyond Earnings For The Full Story

Even though Swaraj Suiting Limited (NSE:SWARAJ) posted strong earnings recently, the stock hasn't reacted in a large way. We think that investors might be worried about the foundations the earnings are built on.

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Examining Cashflow Against Swaraj Suiting's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. 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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2025, Swaraj Suiting had an accrual ratio of 0.34. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. In the last twelve months it actually had negative free cash flow, with an outflow of ₹970m despite its profit of ₹414.8m, mentioned above. We also note that Swaraj Suiting's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹970m. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

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

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. In fact, Swaraj Suiting increased the number of shares on issue by 21% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Swaraj Suiting's EPS by clicking here.

A Look At The Impact Of Swaraj Suiting's Dilution On Its Earnings Per Share (EPS)

Swaraj Suiting has improved its profit over the last three years, with an annualized gain of 1,024% in that time. In comparison, earnings per share only gained 806% over the same period. And at a glance the 81% gain in profit over the last year impresses. But in comparison, EPS only increased by 53% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Swaraj Suiting shareholders will want to see that EPS figure continue to increase. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On Swaraj Suiting's Profit Performance

In conclusion, Swaraj Suiting has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means its earnings per share growth is weaker than its profit growth. Considering all this we'd argue Swaraj Suiting's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Swaraj Suiting as a business, it's important to be aware of any risks it's facing. To help with this, we've discovered 4 warning signs (2 are a bit unpleasant!) that you ought to be aware of before buying any shares in Swaraj Suiting.

Our examination of Swaraj Suiting has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.