We Think You Should Be Aware Of Some Concerning Factors In Geekay Wires' (NSE:GEEKAYWIRE) Earnings

The market shrugged off Geekay Wires Limited's (NSE:GEEKAYWIRE) solid earnings report. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

See our latest analysis for Geekay Wires

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

Geekay Wires has an accrual ratio of 0.34 for the year to December 2024. 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. In the last twelve months it actually had negative free cash flow, with an outflow of ₹277m despite its profit of ₹387.2m, mentioned above. We saw that FCF was ₹589m a year ago though, so Geekay Wires has at least been able to generate positive FCF in the past. One positive for Geekay Wires shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

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

Our Take On Geekay Wires' Profit Performance

As we discussed above, we think Geekay Wires' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Geekay Wires' underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. So while earnings quality is important, it's equally important to consider the risks facing Geekay Wires at this point in time. Every company has risks, and we've spotted 4 warning signs for Geekay Wires (of which 2 can't be ignored!) you should know about.

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