Yatharth Hospital & Trauma Care Services' (NSE:YATHARTH) Earnings Are Weaker Than They Seem

Investors were disappointed with Yatharth Hospital & Trauma Care Services Limited's (NSE:YATHARTH) earnings, despite the strong profit numbers. We think that the market might be paying attention to some underlying factors that they find to be concerning.

See our latest analysis for Yatharth Hospital & Trauma Care Services

Zooming In On Yatharth Hospital & Trauma Care Services' 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.

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. 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.

For the year to March 2024, Yatharth Hospital & Trauma Care Services had an accrual ratio of 0.37. 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. In the last twelve months it actually had negative free cash flow, with an outflow of ₹964m despite its profit of ₹1.14b, mentioned above. It's worth noting that Yatharth Hospital & Trauma Care Services generated positive FCF of ₹440m 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 Yatharth Hospital & Trauma Care Services' Profit Performance

As we discussed above, we think Yatharth Hospital & Trauma Care Services' earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Yatharth Hospital & Trauma Care Services' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate 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. If you want to do dive deeper into Yatharth Hospital & Trauma Care Services, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 1 warning sign for Yatharth Hospital & Trauma Care Services you should know about.

This note has only looked at a single factor that sheds light on the nature of Yatharth Hospital & Trauma Care Services' 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 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.