Dharamsi Morarji Chemical's (NSE:DHARAMSI) Anemic Earnings Might Be Worse Than You Think

The Dharamsi Morarji Chemical Company Limited's (NSE:DHARAMSI) stock showed strength after its weak earnings report. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Dharamsi Morarji Chemical.

Check out our latest analysis for Dharamsi Morarji Chemical

A Closer Look At Dharamsi Morarji Chemical'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.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to March 2022, Dharamsi Morarji Chemical recorded an accrual ratio of 0.30. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Even though it reported a profit of ₹213.4m, a look at free cash flow indicates it actually burnt through ₹481m in the last year. We also note that Dharamsi Morarji Chemical's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹481m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Dharamsi Morarji Chemical.

Our Take On Dharamsi Morarji Chemical's Profit Performance

Dharamsi Morarji Chemical's 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. Because of this, we think that it may be that Dharamsi Morarji Chemical's statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. 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 Dharamsi Morarji Chemical as a business, it's important to be aware of any risks it's facing. When we did our research, we found 2 warning signs for Dharamsi Morarji Chemical (1 is concerning!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Dharamsi Morarji Chemical's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.