Investors Shouldn't Be Too Comfortable With B&B Triplewall Containers' (NSE:BBTCL) Robust Earnings

B&B Triplewall Containers Limited (NSE:BBTCL) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

Check out our latest analysis for B&B Triplewall Containers

Zooming In On B&B Triplewall Containers' 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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 2022, B&B Triplewall Containers had an accrual ratio of 0.23. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of ₹244.4m, a look at free cash flow indicates it actually burnt through ₹49m in the last year. We also note that B&B Triplewall Containers' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹49m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of B&B Triplewall Containers.

Our Take On B&B Triplewall Containers' Profit Performance

B&B Triplewall Containers' 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. Therefore, it seems possible to us that B&B Triplewall Containers' 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. If you'd like to know more about B&B Triplewall Containers as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 5 warning signs we've spotted with B&B Triplewall Containers (including 2 which are potentially serious).

This note has only looked at a single factor that sheds light on the nature of B&B Triplewall Containers' 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.