Concerns Surrounding Yash Optics & Lens' (NSE:YASHOPTICS) Performance

Yash Optics & Lens Limited's (NSE:YASHOPTICS) robust recent earnings didn't do much to move the stock. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

View our latest analysis for Yash Optics & Lens

Zooming In On Yash Optics & Lens' 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to September 2024, Yash Optics & Lens recorded an accrual ratio of 0.28. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of ₹52m, in contrast to the aforementioned profit of ₹92.8m. We also note that Yash Optics & Lens' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹52m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Yash Optics & Lens.

Our Take On Yash Optics & Lens' Profit Performance

Yash Optics & Lens' accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that Yash Optics & Lens' statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 69% per annum growth in EPS for the last three. 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. If you want to do dive deeper into Yash Optics & Lens, you'd also look into what risks it is currently facing. For instance, we've identified 2 warning signs for Yash Optics & Lens (1 is a bit concerning) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Yash Optics & Lens' profit. But there are plenty of other ways to inform your opinion of a company. 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.