United Polyfab Gujarat's (NSE:UNITEDPOLY) Performance Is Even Better Than Its Earnings Suggest

United Polyfab Gujarat Limited's (NSE:UNITEDPOLY) strong earnings report was rewarded with a positive stock price move. We did some digging and found some further encouraging factors that investors will like.

See our latest analysis for United Polyfab Gujarat

Examining Cashflow Against United Polyfab Gujarat'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.

For the year to September 2021, United Polyfab Gujarat had an accrual ratio of -0.17. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of ₹333m, well over the ₹91.5m it reported in profit. United Polyfab Gujarat'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 United Polyfab Gujarat.

Our Take On United Polyfab Gujarat's Profit Performance

Happily for shareholders, United Polyfab Gujarat produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that United Polyfab Gujarat's statutory profit actually understates its earnings potential! And it's also positive that the company showed enough improvement to book a profit this year, after losing money 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. So while earnings quality is important, it's equally important to consider the risks facing United Polyfab Gujarat at this point in time. In terms of investment risks, we've identified 3 warning signs with United Polyfab Gujarat, and understanding these should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of United Polyfab Gujarat'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 that insiders are buying to be useful.

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.

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