Some May Be Optimistic About AVT Natural Products' (NSE:AVTNPL) Earnings

Soft earnings didn't appear to concern AVT Natural Products Limited's (NSE:AVTNPL) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for AVT Natural Products

Zooming In On AVT Natural Products' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2023, AVT Natural Products had an accrual ratio of -0.14. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of ₹1.0b in the last year, which was a lot more than its statutory profit of ₹474.1m. AVT Natural Products shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of AVT Natural Products.

Our Take On AVT Natural Products' Profit Performance

As we discussed above, AVT Natural Products has perfectly satisfactory free cash flow relative to profit. Because of this, we think AVT Natural Products' earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at 25% per year over the last three years. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. You'd be interested to know, that we found 2 warning signs for AVT Natural Products and you'll want to know about these bad boys.

Today we've zoomed in on a single data point to better understand the nature of AVT Natural Products' profit. 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 that insiders are buying 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.