Stock Analysis

There May Be Reason For Hope In Indo Borax & Chemicals' (NSE:INDOBORAX) Disappointing Earnings

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Indo Borax & Chemicals Limited's (NSE:INDOBORAX) earnings announcement last week didn't impress shareholders. While the headline numbers were soft, we believe that investors might be missing some encouraging factors.

See our latest analysis for Indo Borax & Chemicals

NSEI:INDOBORAX Earnings and Revenue History June 8th 2024

Zooming In On Indo Borax & Chemicals' 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. 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Indo Borax & Chemicals has an accrual ratio of -0.16 for the year to March 2024. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of ₹633m during the period, dwarfing its reported profit of ₹389.8m. Indo Borax & Chemicals' free cash flow improved over the last year, which is generally good to see.

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

Happily for shareholders, Indo Borax & Chemicals produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Indo Borax & Chemicals' statutory profit actually understates its earnings potential! And the EPS is up 14% annually, over the last three years. 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. 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. Every company has risks, and we've spotted 1 warning sign for Indo Borax & Chemicals you should know about.

This note has only looked at a single factor that sheds light on 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. 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.

Valuation is complex, but we're helping make it simple.

Find out whether Indo Borax & Chemicals is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.