Associated Alcohols & Breweries' (NSE:ASALCBR) Robust Earnings Are Supported By Other Strong Factors

Associated Alcohols & Breweries Limited (NSE:ASALCBR) just reported healthy earnings but the stock price didn't move much. Our analysis suggests that investors might be missing some promising details.

View our latest analysis for Associated Alcohols & Breweries

A Closer Look At Associated Alcohols & Breweries' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. The ratio shows us how much a company's profit exceeds its FCF.

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. 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 September 2021, Associated Alcohols & Breweries had an accrual ratio of -0.13. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of ₹888m in the last year, which was a lot more than its statutory profit of ₹644.3m. Associated Alcohols & Breweries' free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Associated Alcohols & Breweries.

Our Take On Associated Alcohols & Breweries' Profit Performance

As we discussed above, Associated Alcohols & Breweries has perfectly satisfactory free cash flow relative to profit. Because of this, we think Associated Alcohols & Breweries' earnings potential is at least as good as it seems, and maybe even better! Better yet, its EPS are growing strongly, which is nice to see. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Associated Alcohols & Breweries, you'd also look into what risks it is currently facing. While conducting our analysis, we found that Associated Alcohols & Breweries has 1 warning sign and it would be unwise to ignore it.

This note has only looked at a single factor that sheds light on the nature of Associated Alcohols & Breweries' 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 that insiders are buying to be useful.

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.

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