We Like The Quality Of Kohinoor Foods' (NSE:KOHINOOR) Earnings

The market shrugged off Kohinoor Foods Limited's (NSE:KOHINOOR) solid earnings report. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

Our analysis indicates that KOHINOOR is potentially undervalued!

Zooming In On Kohinoor Foods' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2022, Kohinoor Foods had an accrual ratio of -0.59. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of ₹1.4b during the period, dwarfing its reported profit of ₹119.5m. Given that Kohinoor Foods had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₹1.4b would seem to be a step in the right direction. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Kohinoor Foods.

The Impact Of Unusual Items On Profit

Surprisingly, given Kohinoor Foods' accrual ratio implied strong cash conversion, its paper profit was actually boosted by ₹96m in unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Kohinoor Foods' positive unusual items were quite significant relative to its profit in the year to September 2022. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Kohinoor Foods' Profit Performance

In conclusion, Kohinoor Foods' accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Based on these factors, it's hard to tell if Kohinoor Foods' profits are a reasonable reflection of its underlying profitability. So while earnings quality is important, it's equally important to consider the risks facing Kohinoor Foods at this point in time. For instance, we've identified 4 warning signs for Kohinoor Foods (1 shouldn't be ignored) you should be familiar with.

Our examination of Kohinoor Foods has focussed on certain factors that can make its earnings look better than they are. 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. 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.