Indo Borax & Chemicals (NSE:INDOBORAX) Strong Profits May Be Masking Some Underlying Issues

Indo Borax & Chemicals Limited's (NSE:INDOBORAX) healthy profit numbers didn't contain any surprises for investors. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

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Examining Cashflow Against Indo Borax & Chemicals' 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. 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 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".

For the year to March 2025, Indo Borax & Chemicals had an accrual ratio of 0.63. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of ₹425.1m, a look at free cash flow indicates it actually burnt through ₹787m in the last year. We saw that FCF was ₹633m a year ago though, so Indo Borax & Chemicals has at least been able to generate positive FCF in the past. The good news for shareholders is that Indo Borax & Chemicals' accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. 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 Indo Borax & Chemicals.

Our Take On Indo Borax & Chemicals' Profit Performance

As we have made quite clear, we're a bit worried that Indo Borax & Chemicals didn't back up the last year's profit with free cashflow. For this reason, we think that Indo Borax & Chemicals' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But at least holders can take some solace from the 17% per annum growth in EPS for the last three. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Indo Borax & Chemicals as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Indo Borax & Chemicals (including 1 which makes us a bit uncomfortable).

Today we've zoomed in on a single data point to better understand the nature of Indo Borax & Chemicals' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.