Speciality Restaurants' (NSE:SPECIALITY) Problems Go Beyond Weak Profit

Following the release of a lackluster earnings report from Speciality Restaurants Limited (NSE:SPECIALITY) the stock price made a strong positive move. Our analysis suggests that there are some positive factors lying below the troubling profit numbers which investors are finding comfort in.

Our free stock report includes 3 warning signs investors should be aware of before investing in Speciality Restaurants. Read for free now.

Examining Cashflow Against Speciality Restaurants' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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. 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.

Speciality Restaurants has an accrual ratio of -0.10 for the year to March 2025. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of ₹363m during the period, dwarfing its reported profit of ₹217.2m. Speciality Restaurants' free cash flow improved over the last year, which is generally good to see. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

View our latest analysis for Speciality Restaurants

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

The Impact Of Unusual Items On Profit

Surprisingly, given Speciality Restaurants' accrual ratio implied strong cash conversion, its paper profit was actually boosted by ₹38m in unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. If Speciality Restaurants doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Speciality Restaurants' Profit Performance

Speciality Restaurants' profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Having considered these factors, we don't think Speciality Restaurants' statutory profits give an overly harsh view of the business. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. In terms of investment risks, we've identified 3 warning signs with Speciality Restaurants, and understanding these bad boys should be part of your investment process.

Our examination of Speciality Restaurants has focussed on certain factors that can make its earnings look better than they are. 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. 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.