Are Tasty Bite Eatables's (NSE:TASTYBITE) Statutory Earnings A Good Reflection Of Its Earnings Potential?

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. In this article, we'll look at how useful this year's statutory profit is, when analysing Tasty Bite Eatables (NSE:TASTYBITE).

We like the fact that Tasty Bite Eatables made a profit of ₹342.0m on its revenue of ₹3.74b, in the last year. One positive is that it has grown both its profit and its revenue, over the last few years.

See our latest analysis for Tasty Bite Eatables

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 Tasty Bite Eatables' 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 Tasty Bite Eatables.

A Closer Look At Tasty Bite Eatables' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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.

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

Tasty Bite Eatables has an accrual ratio of 0.26 for the year to September 2020. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In the last twelve months it actually had negative free cash flow, with an outflow of ₹184m despite its profit of ₹342.0m, mentioned above. We saw that FCF was ₹171m a year ago though, so Tasty Bite Eatables has at least been able to generate positive FCF in the past.

Our Take On Tasty Bite Eatables' Profit Performance

Tasty Bite Eatables didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Tasty Bite Eatables' statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 35% per annum growth in EPS for the last three. 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. If you'd like to know more about Tasty Bite Eatables as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 1 warning sign for Tasty Bite Eatables you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Tasty Bite Eatables' 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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