We Think Dr. Lal PathLabs' (NSE:LALPATHLAB) Profit Is Only A Baseline For What They Can Achieve

Dr. Lal PathLabs Limited's (NSE:LALPATHLAB) strong earnings report was rewarded with a positive stock price move. We have done some analysis, and we found several positive factors beyond the profit numbers.

View our latest analysis for Dr. Lal PathLabs

Zooming In On Dr. Lal PathLabs' 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. 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".

For the year to March 2024, Dr. Lal PathLabs had an accrual ratio of -0.11. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of ₹4.8b in the last year, which was a lot more than its statutory profit of ₹3.58b. Dr. Lal PathLabs' free cash flow improved over the last year, which is generally good to see.

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 Dr. Lal PathLabs' Profit Performance

As we discussed above, Dr. Lal PathLabs has perfectly satisfactory free cash flow relative to profit. Because of this, we think Dr. Lal PathLabs' earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 22% annually, over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Dr. Lal PathLabs at this point in time. For example - Dr. Lal PathLabs has 2 warning signs we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Dr. Lal PathLabs' 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. 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 with significant insider holdings 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.