Gandhar Oil Refinery (India)'s (NSE:GANDHAR) Anemic Earnings Might Be Worse Than You Think

The market wasn't impressed with the soft earnings from Gandhar Oil Refinery (India) Limited (NSE:GANDHAR) recently. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.

Check out our latest analysis for Gandhar Oil Refinery (India)

Examining Cashflow Against Gandhar Oil Refinery (India)'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). 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 2024, Gandhar Oil Refinery (India) recorded an accrual ratio of 0.26. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In the last twelve months it actually had negative free cash flow, with an outflow of ₹1.2b despite its profit of ₹1.41b, mentioned above. It's worth noting that Gandhar Oil Refinery (India) generated positive FCF of ₹487m a year ago, so at least they've done it in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Gandhar Oil Refinery (India).

Our Take On Gandhar Oil Refinery (India)'s Profit Performance

Gandhar Oil Refinery (India) didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Gandhar Oil Refinery (India)'s true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 30% per annum growth in EPS for the last three. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 1 warning sign with Gandhar Oil Refinery (India), and understanding this should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Gandhar Oil Refinery (India)'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 with high insider ownership.

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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.