We Think That There Are Issues Underlying Vasa Denticity's (NSE:DENTALKART) Earnings

Vasa Denticity Limited (NSE:DENTALKART) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for Vasa Denticity

Zooming In On Vasa Denticity's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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.

Vasa Denticity has an accrual ratio of 0.79 for the year to September 2024. 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. Over the last year it actually had negative free cash flow of ₹237m, in contrast to the aforementioned profit of ₹175.7m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₹237m, this year, indicates high risk.

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

Our Take On Vasa Denticity's Profit Performance

As we have made quite clear, we're a bit worried that Vasa Denticity didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Vasa Denticity's underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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 want to do dive deeper into Vasa Denticity, you'd also look into what risks it is currently facing. At Simply Wall St, we found 1 warning sign for Vasa Denticity and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Vasa Denticity's 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.