Earnings Troubles May Signal Larger Issues for Jai Balaji Industries (NSE:JAIBALAJI) Shareholders

Jai Balaji Industries Limited's (NSE:JAIBALAJI) recent weak earnings report didn't cause a big stock movement. However, we believe that investors should be aware of some underlying factors which may be of concern.

Our free stock report includes 2 warning signs investors should be aware of before investing in Jai Balaji Industries. Read for free now.

Examining Cashflow Against Jai Balaji Industries' 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Jai Balaji Industries has an accrual ratio of 0.27 for the year to March 2025. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of ₹5.58b, a look at free cash flow indicates it actually burnt through ₹465m in the last year. We saw that FCF was ₹4.6b a year ago though, so Jai Balaji Industries has at least been able to generate positive FCF in the past. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Jai Balaji Industries issued 11% more new shares 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. You can see a chart of Jai Balaji Industries' EPS by clicking here.

How Is Dilution Impacting Jai Balaji Industries' Earnings Per Share (EPS)?

As you can see above, Jai Balaji Industries has been growing its net income over the last few years, with an annualized gain of 1,061% over three years. But EPS was only up 618% per year, in the exact same period. Net income was down 37% over the last twelve months. But the EPS result was even worse, with the company recording a decline of 44%. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, if Jai Balaji Industries' 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 Jai Balaji Industries' Profit Performance

As it turns out, Jai Balaji Industries couldn't match its profit with cashflow and its dilution means that shareholders own less of the company than the did before (unless they bought more shares). For the reasons mentioned above, we think that a perfunctory glance at Jai Balaji Industries' statutory profits might make it look better than it really is on an underlying level. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, Jai Balaji Industries has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

Our examination of Jai Balaji Industries has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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.