We Think You Should Be Aware Of Some Concerning Factors In Hi-Green Carbon's (NSE:HIGREEN) Earnings

Hi-Green Carbon Limited's (NSE:HIGREEN ) stock didn't jump after it announced some healthy earnings. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

View our latest analysis for Hi-Green Carbon

Zooming In On Hi-Green Carbon's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to September 2024, Hi-Green Carbon recorded an accrual ratio of 0.76. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of ₹103.9m, a look at free cash flow indicates it actually burnt through ₹459m in the last year. We also note that Hi-Green Carbon's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹459m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hi-Green Carbon.

Our Take On Hi-Green Carbon's Profit Performance

As we discussed above, we think Hi-Green Carbon's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Hi-Green Carbon's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For instance, we've identified 3 warning signs for Hi-Green Carbon (2 are significant) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Hi-Green Carbon'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.