Earnings Troubles May Signal Larger Issues for Chaman Lal Setia Exports (NSE:CLSEL) Shareholders

A lackluster earnings announcement from Chaman Lal Setia Exports Ltd. (NSE:CLSEL) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

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Zooming In On Chaman Lal Setia Exports' 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to September 2025, Chaman Lal Setia Exports recorded an accrual ratio of 0.35. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Over the last year it actually had negative free cash flow of ₹844m, in contrast to the aforementioned profit of ₹941.3m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₹844m, this year, indicates high risk.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Chaman Lal Setia Exports.

Our Take On Chaman Lal Setia Exports' Profit Performance

As we have made quite clear, we're a bit worried that Chaman Lal Setia Exports didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Chaman Lal Setia Exports' underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 21% per annum growth in EPS for the last three. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Chaman Lal Setia Exports as a business, it's important to be aware of any risks it's facing. Our analysis shows 2 warning signs for Chaman Lal Setia Exports (1 shouldn't be ignored!) and we strongly recommend you look at them before investing.

This note has only looked at a single factor that sheds light on the nature of Chaman Lal Setia Exports' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.