Dhanuka Agritech (NSE:DHANUKA) Is Growing Earnings But Are They A Good Guide?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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 Dhanuka Agritech (NSE:DHANUKA).

It's good to see that over the last twelve months Dhanuka Agritech made a profit of ₹1.89b on revenue of ₹13.2b. One positive is that it has grown both its profit and its revenue, over the last few years.

View our latest analysis for Dhanuka Agritech

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. So today we'll look at what Dhanuka Agritech's cashflow tells us about the quality of its earnings. 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.

A Closer Look At Dhanuka Agritech's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Dhanuka Agritech has an accrual ratio of -0.11 for the year to September 2020. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of ₹2.6b during the period, dwarfing its reported profit of ₹1.89b. Dhanuka Agritech shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On Dhanuka Agritech's Profit Performance

Dhanuka Agritech's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Dhanuka Agritech's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at 66% per year 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 if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 1 warning sign for Dhanuka Agritech you should know about.

Today we've zoomed in on a single data point to better understand the nature of Dhanuka Agritech's 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 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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