Krsnaa Diagnostics' (NSE:KRSNAA) Anemic Earnings Might Be Worse Than You Think

Investors were disappointed by Krsnaa Diagnostics Limited's (NSE:KRSNAA ) latest earnings release. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

Our analysis indicates that KRSNAA is potentially undervalued!

Examining Cashflow Against Krsnaa Diagnostics' 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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.

Krsnaa Diagnostics has an accrual ratio of 0.42 for the year to September 2022. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of ₹1.1b despite its profit of ₹638.2m, mentioned above. It's worth noting that Krsnaa Diagnostics generated positive FCF of ₹159m a year ago, so at least they've done it in the past.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Krsnaa Diagnostics' Profit Performance

As we discussed above, we think Krsnaa Diagnostics' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Krsnaa Diagnostics' underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. 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 Krsnaa Diagnostics as a business, it's important to be aware of any risks it's facing. For example, we've found that Krsnaa Diagnostics has 3 warning signs (1 can't be ignored!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of Krsnaa Diagnostics' 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. 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. 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.