Are Colgate-Palmolive (India)'s (NSE:COLPAL) Statutory Earnings A Good Guide To Its Underlying Profitability?

Broadly speaking, profitable businesses are less risky than unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding Colgate-Palmolive (India) (NSE:COLPAL).

We like the fact that Colgate-Palmolive (India) made a profit of ₹8.76b on its revenue of ₹45.4b, in the last year. One positive is that it has grown both its profit and its revenue, over the last few years.

Check out our latest analysis for Colgate-Palmolive (India)

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. So today we'll look at what Colgate-Palmolive (India)'s cashflow tells us about the quality of its earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Colgate-Palmolive (India).

Zooming In On Colgate-Palmolive (India)'s 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. 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'.

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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2020, Colgate-Palmolive (India) had an accrual ratio of -0.18. 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 ₹11b, well over the ₹8.76b it reported in profit. Colgate-Palmolive (India) shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On Colgate-Palmolive (India)'s Profit Performance

Happily for shareholders, Colgate-Palmolive (India) produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Colgate-Palmolive (India)'s statutory profit actually understates its earnings potential! And the EPS is up 50% annually, over the last three years. 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 want to do dive deeper into Colgate-Palmolive (India), you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 1 warning sign for Colgate-Palmolive (India) you should know about.

This note has only looked at a single factor that sheds light on the nature of Colgate-Palmolive (India)'s 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 that insiders are buying to be useful.

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This article by Simply Wall St is general in nature. 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.
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