We Think That There Are Some Issues For KN Agri Resources (NSE:KNAGRI) Beyond Its Promising Earnings

The stock price didn't jump after KN Agri Resources Limited (NSE:KNAGRI) posted decent earnings last week. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

View our latest analysis for KN Agri Resources

Examining Cashflow Against KN Agri Resources' 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 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".

KN Agri Resources has an accrual ratio of 0.57 for the year to September 2022. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of ₹842m despite its profit of ₹417.0m, mentioned above. We also note that KN Agri Resources' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹842m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of KN Agri Resources.

Our Take On KN Agri Resources' Profit Performance

As we discussed above, we think KN Agri Resources' 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 KN Agri Resources' underlying earnings power is lower than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 57% over the last three years. 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 KN Agri Resources as a business, it's important to be aware of any risks it's facing. When we did our research, we found 2 warning signs for KN Agri Resources (1 doesn't sit too well with us!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of KN Agri Resources' 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. 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.