Osia Hyper Retail's (NSE:OSIAHYPER) Earnings Are Weaker Than They Seem

Last week's profit announcement from Osia Hyper Retail Limited (NSE:OSIAHYPER) was underwhelming for investors, despite headline numbers being robust. We think that the market might be paying attention to some underlying factors that they find to be concerning.

Check out our latest analysis for Osia Hyper Retail

Zooming In On Osia Hyper Retail'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). 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 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".

Osia Hyper Retail has an accrual ratio of 0.27 for the year to September 2024. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In the last twelve months it actually had negative free cash flow, with an outflow of ₹626m despite its profit of ₹197.6m, mentioned above. We saw that FCF was ₹27m a year ago though, so Osia Hyper Retail has at least been able to generate positive FCF in the past. 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 Osia Hyper Retail.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Osia Hyper Retail expanded the number of shares on issue by 29% over the last year. That means its earnings are split among a greater number of shares. 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. Check out Osia Hyper Retail's historical EPS growth by clicking on this link.

A Look At The Impact Of Osia Hyper Retail's Dilution On Its Earnings Per Share (EPS)

Osia Hyper Retail has improved its profit over the last three years, with an annualized gain of 131% in that time. But EPS was only up 87% per year, in the exact same period. And the 58% profit boost in the last year certainly seems impressive at first glance. On the other hand, earnings per share are only up 55% in that time. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Osia Hyper Retail can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Osia Hyper Retail's Profit Performance

As it turns out, Osia Hyper Retail couldn't match its profit with cashflow and its dilution means that earnings per share growth is lagging net income growth. Considering all this we'd argue Osia Hyper Retail's profits probably give an overly generous impression of its sustainable level of profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. When we did our research, we found 4 warning signs for Osia Hyper Retail (2 are potentially serious!) that we believe deserve your full attention.

Our examination of Osia Hyper Retail 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. 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 with significant insider holdings to be useful.

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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.