We Think Jay Shree Tea & Industries' (NSE:JAYSREETEA) Profit Is Only A Baseline For What They Can Achieve

The subdued stock price reaction suggests that Jay Shree Tea & Industries Limited's (NSE:JAYSREETEA) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

See our latest analysis for Jay Shree Tea & Industries

Examining Cashflow Against Jay Shree Tea & 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. 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. 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. 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.

Jay Shree Tea & Industries has an accrual ratio of -0.10 for the year to March 2021. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of ₹839m during the period, dwarfing its reported profit of ₹190.5m. Notably, Jay Shree Tea & Industries had negative free cash flow last year, so the ₹839m it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jay Shree Tea & Industries.

Our Take On Jay Shree Tea & Industries' Profit Performance

Jay Shree Tea & Industries' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Jay Shree Tea & Industries' earnings potential is at least as good as it seems, and maybe even better! And it's also positive that the company showed enough improvement to book a profit this year, after losing money last year. 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 Jay Shree Tea & Industries as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 3 warning signs for Jay Shree Tea & Industries you should be mindful of and 1 of these shouldn't be ignored.

This note has only looked at a single factor that sheds light on the nature of Jay Shree Tea & Industries' profit. But there are plenty of other ways to inform your opinion of a company. 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 that insiders are buying.

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This article by Simply Wall St is general in nature. 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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