Chennai Petroleum (NSE:CHENNPETRO) Is Posting Promising Earnings But The Good News Doesn’t Stop There

Chennai Petroleum Corporation Limited (NSE:CHENNPETRO) announced a healthy earnings result recently, and the market rewarded it with a strong uplift in the stock price. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

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Examining Cashflow Against Chennai Petroleum's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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.

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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to September 2025, Chennai Petroleum recorded an accrual ratio of -0.26. 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 ₹43b, well over the ₹11.7b it reported in profit. Given that Chennai Petroleum had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₹43b would seem to be a step in the right direction.

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

Our Take On Chennai Petroleum's Profit Performance

As we discussed above, Chennai Petroleum's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Chennai Petroleum's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 63% over the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Chennai Petroleum as a business, it's important to be aware of any risks it's facing. For example - Chennai Petroleum has 1 warning sign we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Chennai Petroleum's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.