Is There More To The Story Than K.M. Sugar Mills's (NSE:KMSUGAR) Earnings Growth?

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing K.M. Sugar Mills (NSE:KMSUGAR).

While K.M. Sugar Mills was able to generate revenue of ₹6.41b in the last twelve months, we think its profit result of ₹278.0m was more important. Happily, it has grown both its profit and revenue over the last three years, as you can see in the chart below.

See our latest analysis for K.M. Sugar Mills

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. Today, we'll discuss K.M. Sugar Mills' free cashflow relative to its earnings, and consider what that tells us about the company. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of K.M. Sugar Mills.

Zooming In On K.M. Sugar Mills' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to September 2020, K.M. Sugar Mills recorded an accrual ratio of -0.42. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of ₹1.5b, well over the ₹278.0m it reported in profit. Given that K.M. Sugar Mills had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₹1.5b would seem to be a step in the right direction.

Our Take On K.M. Sugar Mills' Profit Performance

Happily for shareholders, K.M. Sugar Mills produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that K.M. Sugar Mills' statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 18% per year over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. You'd be interested to know, that we found 2 warning signs for K.M. Sugar Mills and you'll want to know about them.

Today we've zoomed in on a single data point to better understand the nature of K.M. Sugar Mills' 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 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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