D.P. Wires' (NSE:DPWIRES) Soft Earnings Don't Show The Whole Picture

Shareholders appeared unconcerned with D.P. Wires Limited's (NSE:DPWIRES) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

See our latest analysis for D.P. Wires

Zooming In On D.P. Wires' 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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2024, D.P. Wires had an accrual ratio of -0.39. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of ₹1.1b during the period, dwarfing its reported profit of ₹293.6m. Given that D.P. Wires had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₹1.1b would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of D.P. Wires.

Our Take On D.P. Wires' Profit Performance

Happily for shareholders, D.P. Wires produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that D.P. Wires' statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. You'd be interested to know, that we found 1 warning sign for D.P. Wires and you'll want to know about this.

Today we've zoomed in on a single data point to better understand the nature of D.P. Wires' 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. 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.