Chambal Fertilisers and Chemicals' (NSE:CHAMBLFERT) Profits May Be Overstating Its True Earnings Potential

Solid profit numbers didn't seem to be enough to please Chambal Fertilisers and Chemicals Limited's (NSE:CHAMBLFERT) shareholders. We think that they might be concerned about some underlying details that our analysis found.

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Examining Cashflow Against Chambal Fertilisers and Chemicals' 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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Chambal Fertilisers and Chemicals has an accrual ratio of 0.52 for the year to September 2025. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of ₹18.6b, a look at free cash flow indicates it actually burnt through ₹18b in the last year. We saw that FCF was ₹17b a year ago though, so Chambal Fertilisers and Chemicals has at least been able to generate positive FCF in the past. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio. One positive for Chambal Fertilisers and Chemicals shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

See our latest analysis for Chambal Fertilisers and Chemicals

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.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Chambal Fertilisers and Chemicals' profit was boosted by unusual items worth ₹1.6b in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Chambal Fertilisers and Chemicals' Profit Performance

Summing up, Chambal Fertilisers and Chemicals received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. For the reasons mentioned above, we think that a perfunctory glance at Chambal Fertilisers and Chemicals' statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Chambal Fertilisers and Chemicals, you'd also look into what risks it is currently facing. For example, Chambal Fertilisers and Chemicals has 3 warning signs (and 2 which can't be ignored) we think you should know about.

Our examination of Chambal Fertilisers and Chemicals has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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 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.