Jainam Ferro Alloys (I)'s (NSE:JAINAM) Promising Earnings May Rest On Soft Foundations

Despite posting some strong earnings, the market for Jainam Ferro Alloys (I) Limited's (NSE:JAINAM) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

Check out our latest analysis for Jainam Ferro Alloys (I)

Examining Cashflow Against Jainam Ferro Alloys (I)'s Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. This ratio tells us how much of a company's profit is not backed by free cashflow.

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

Over the twelve months to March 2022, Jainam Ferro Alloys (I) recorded an accrual ratio of 1.31. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of ₹280.3m, a look at free cash flow indicates it actually burnt through ₹45m in the last year. We saw that FCF was ₹70m a year ago though, so Jainam Ferro Alloys (I) has at least been able to generate positive FCF in the past. One positive for Jainam Ferro Alloys (I) 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 Jainam Ferro Alloys (I).

Our Take On Jainam Ferro Alloys (I)'s Profit Performance

As we have made quite clear, we're a bit worried that Jainam Ferro Alloys (I) didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Jainam Ferro Alloys (I)'s 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. 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. 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 2 warning signs for Jainam Ferro Alloys (I) (of which 1 can't be ignored!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Jainam Ferro Alloys (I)'s 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 that insiders are buying 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.