We Think Indraprastha Medical's (NSE:INDRAMEDCO) Profit Is Only A Baseline For What They Can Achieve

Indraprastha Medical Corporation Limited's (NSE:INDRAMEDCO) strong earnings report was rewarded with a positive stock price move. Our analysis found some more factors that we think are good for shareholders.

Check out the opportunities and risks within the IN Healthcare industry.

Examining Cashflow Against Indraprastha Medical's 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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Indraprastha Medical has an accrual ratio of -0.22 for the year to September 2022. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of ₹1.1b, well over the ₹765.1m it reported in profit. Indraprastha Medical's free cash flow improved over the last year, which is generally good to see.

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

Our Take On Indraprastha Medical's Profit Performance

As we discussed above, Indraprastha Medical's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Indraprastha Medical's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 40% over the last twelve months. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. You'd be interested to know, that we found 2 warning signs for Indraprastha Medical and you'll want to know about these.

This note has only looked at a single factor that sheds light on the nature of Indraprastha Medical's 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. 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.