Baheti Recycling Industries' (NSE:BAHETI) Promising Earnings May Rest On Soft Foundations

Baheti Recycling Industries Limited (NSE:BAHETI) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

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Zooming In On Baheti Recycling Industries' 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. 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. 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 2025, Baheti Recycling Industries recorded an accrual ratio of 0.24. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of ₹202.6m, a look at free cash flow indicates it actually burnt through ₹370m in the last year. We also note that Baheti Recycling Industries' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹370m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Baheti Recycling Industries.

Our Take On Baheti Recycling Industries' Profit Performance

Baheti Recycling Industries didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Baheti Recycling Industries' true underlying earnings power is actually less than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Baheti Recycling Industries at this point in time. Every company has risks, and we've spotted 3 warning signs for Baheti Recycling Industries (of which 2 make us uncomfortable!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Baheti Recycling Industries' profit. But there are plenty of other ways to inform your opinion of a company. 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 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.