Wonderla Holidays' (NSE:WONDERLA) Sluggish Earnings Might Be Just The Beginning Of Its Problems

Last week's earnings announcement from Wonderla Holidays Limited (NSE:WONDERLA) was disappointing to investors, with a sluggish profit figure. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

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Examining Cashflow Against Wonderla Holidays' 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. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

For the year to March 2025, Wonderla Holidays had an accrual ratio of 0.31. 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. Over the last year it actually had negative free cash flow of ₹2.1b, in contrast to the aforementioned profit of ₹1.09b. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₹2.1b, this year, indicates high risk. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Wonderla Holidays issued 12% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Wonderla Holidays' EPS by clicking here.

A Look At The Impact Of Wonderla Holidays' Dilution On Its Earnings Per Share (EPS)

Wonderla Holidays was losing money three years ago. And even focusing only on the last twelve months, we see profit is down 31%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 33% in the same period. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Wonderla Holidays' earnings per share can increase, then the share price should too. 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 Wonderla Holidays' Profit Performance

In conclusion, Wonderla Holidays has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). For the reasons mentioned above, we think that a perfunctory glance at Wonderla Holidays' statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Wonderla Holidays, you'd also look into what risks it is currently facing. For example, Wonderla Holidays has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Our examination of Wonderla Holidays 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 are plenty of other ways to inform your opinion of a company. 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.