We Think You Can Look Beyond Ganesh Benzoplast's (NSE:GANESHBE) Lackluster Earnings

The market for Ganesh Benzoplast Limited's (NSE:GANESHBE) shares didn't move much after it posted weak earnings recently. We did some digging, and we believe the earnings are stronger than they seem.

Check out our latest analysis for Ganesh Benzoplast

Zooming In On Ganesh Benzoplast'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Ganesh Benzoplast has an accrual ratio of -0.15 for the year to September 2021. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of ₹454m in the last year, which was a lot more than its statutory profit of ₹117.0m. Ganesh Benzoplast shareholders are no doubt pleased that free cash flow improved over the last twelve months. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

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

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Ganesh Benzoplast expanded the number of shares on issue by 20% over the last year. That means its earnings are split among a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out Ganesh Benzoplast's historical EPS growth by clicking on this link.

A Look At The Impact Of Ganesh Benzoplast's Dilution on Its Earnings Per Share (EPS).

Unfortunately, Ganesh Benzoplast's profit is down 86% per year over three years. Even looking at the last year, profit was still down 72%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 76% in the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Ganesh Benzoplast's earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On Ganesh Benzoplast's Profit Performance

In conclusion, Ganesh Benzoplast has a strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share are dropping faster than its profit. Given the contrasting considerations, we don't have a strong view as to whether Ganesh Benzoplast's profits are an apt reflection of its underlying potential for profit. If you'd like to know more about Ganesh Benzoplast as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 4 warning signs for Ganesh Benzoplast you should be mindful of and 1 of them is potentially serious.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.

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.

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