Earnings Troubles May Signal Larger Issues for Chaman Metallics (NSE:CMNL) Shareholders

A lackluster earnings announcement from Chaman Metallics Limited (NSE:CMNL) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.

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Examining Cashflow Against Chaman Metallics' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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.

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.

Over the twelve months to March 2025, Chaman Metallics recorded an accrual ratio of 0.70. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of ₹97.8m, a look at free cash flow indicates it actually burnt through ₹2.3b in the last year. We also note that Chaman Metallics' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹2.3b.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Chaman Metallics.

Our Take On Chaman Metallics' Profit Performance

As we have made quite clear, we're a bit worried that Chaman Metallics didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Chaman Metallics' underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, Chaman Metallics has 4 warning signs (and 3 which are a bit concerning) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of Chaman Metallics' 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. 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.