Rajgor Castor Derivatives' (NSE:RCDL) Earnings Are Weaker Than They Seem

Rajgor Castor Derivatives Limited's (NSE:RCDL) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Check out our latest analysis for Rajgor Castor Derivatives

A Closer Look At Rajgor Castor Derivatives' 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. 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. The ratio shows us how much a company's profit exceeds its FCF.

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

Rajgor Castor Derivatives has an accrual ratio of 0.50 for the year to March 2024. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of ₹373m despite its profit of ₹97.8m, mentioned above. We also note that Rajgor Castor Derivatives' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹373m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Rajgor Castor Derivatives.

Our Take On Rajgor Castor Derivatives' Profit Performance

As we have made quite clear, we're a bit worried that Rajgor Castor Derivatives didn't back up the last year's profit with free cashflow. For this reason, we think that Rajgor Castor Derivatives' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that, its earnings per share increased by 21% in the last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. When we did our research, we found 4 warning signs for Rajgor Castor Derivatives (3 are significant!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of Rajgor Castor Derivatives' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.