Annapurna Swadisht's (NSE:ANNAPURNA) Solid Earnings May Rest On Weak Foundations

Annapurna Swadisht Limited's (NSE:ANNAPURNA ) stock didn't jump after it announced some healthy earnings. We did some digging and believe investors may be worried about some underlying factors in the report.

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A Closer Look At Annapurna Swadisht'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. 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. The ratio shows us how much a company's profit exceeds its FCF.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to September 2025, Annapurna Swadisht recorded an accrual ratio of 0.24. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of ₹244.6m, a look at free cash flow indicates it actually burnt through ₹514m in the last year. We also note that Annapurna Swadisht's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹514m. Unfortunately for shareholders, the company has also been issuing new shares, diluting 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 Annapurna Swadisht.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Annapurna Swadisht issued 20% more new shares over the last year. That means its earnings are split among a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. Check out Annapurna Swadisht's historical EPS growth by clicking on this link.

How Is Dilution Impacting Annapurna Swadisht's Earnings Per Share (EPS)?

Annapurna Swadisht has improved its profit over the last three years, with an annualized gain of 507% in that time. But EPS was only up 403% per year, in the exact same period. And at a glance the 29% gain in profit over the last year impresses. On the other hand, earnings per share are only up 28% in that time. And so, you can see quite clearly that dilution is influencing shareholder earnings.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Annapurna Swadisht shareholders will want to see that EPS figure continue to increase. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Annapurna Swadisht's Profit Performance

As it turns out, Annapurna Swadisht couldn't match its profit with cashflow and its dilution means that earnings per share growth is lagging net income growth. For the reasons mentioned above, we think that a perfunctory glance at Annapurna Swadisht's statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Annapurna Swadisht at this point in time. When we did our research, we found 3 warning signs for Annapurna Swadisht (1 is a bit concerning!) that we believe deserve your full attention.

Our examination of Annapurna Swadisht 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. 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.