Why HMA Agro Industries' (NSE:HMAAGRO) Shaky Earnings Are Just The Beginning Of Its Problems

Last week's earnings announcement from HMA Agro Industries Limited (NSE:HMAAGRO) was disappointing to investors, with a sluggish profit figure. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.

View our latest analysis for HMA Agro Industries

A Closer Look At HMA Agro Industries' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.

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

HMA Agro Industries has an accrual ratio of 0.32 for the year to March 2024. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Even though it reported a profit of ₹1.01b, a look at free cash flow indicates it actually burnt through ₹2.0b in the last year. It's worth noting that HMA Agro Industries generated positive FCF of ₹263m a year ago, so at least they've done it in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of HMA Agro Industries.

Our Take On HMA Agro Industries' Profit Performance

As we discussed above, we think HMA Agro Industries' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that HMA Agro Industries' underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 35% per annum growth in EPS for the last three. 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 HMA Agro Industries, you'd also look into what risks it is currently facing. For example, HMA Agro Industries has 4 warning signs (and 2 which are potentially serious) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of HMA Agro Industries' 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. 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.