Should You Use Ugar Sugar Works's (NSE:UGARSUGAR) Statutory Earnings To Analyse It?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Ugar Sugar Works' (NSE:UGARSUGAR) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Ugar Sugar Works made a profit of ₹392.2m on revenue of ₹8.86b. The good news is that the company managed to grow its revenue over the last three years, and also move from loss-making to profitable.

View our latest analysis for Ugar Sugar Works

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. So today we'll look at what Ugar Sugar Works' cashflow tells us about the quality of its earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Ugar Sugar Works.

Zooming In On Ugar Sugar Works' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to September 2020, Ugar Sugar Works recorded an accrual ratio of -0.12. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of ₹980m in the last year, which was a lot more than its statutory profit of ₹392.2m. Ugar Sugar Works' free cash flow improved over the last year, which is generally good to see.

Our Take On Ugar Sugar Works' Profit Performance

As we discussed above, Ugar Sugar Works has perfectly satisfactory free cash flow relative to profit. Because of this, we think Ugar Sugar Works' earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at an extremely impressive rate over the last year. 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 want to do dive deeper into Ugar Sugar Works, you'd also look into what risks it is currently facing. To that end, you should learn about the 4 warning signs we've spotted with Ugar Sugar Works (including 1 which is concerning).

Today we've zoomed in on a single data point to better understand the nature of Ugar Sugar Works' profit. 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. 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. 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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