Shareholders Can Be Confident That JK Lakshmi Cement's (NSE:JKLAKSHMI) Earnings Are High Quality

When companies post strong earnings, the stock generally performs well, just like JK Lakshmi Cement Limited's (NSE:JKLAKSHMI) stock has recently. We have done some analysis, and we found several positive factors beyond the profit numbers.

Check out our latest analysis for JK Lakshmi Cement

Examining Cashflow Against JK Lakshmi Cement's 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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. 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 2021, JK Lakshmi Cement recorded an accrual ratio of -0.12. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of ₹7.4b in the last year, which was a lot more than its statutory profit of ₹4.05b. JK Lakshmi Cement's free cash flow improved over the last year, which is generally good to see.

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.

Our Take On JK Lakshmi Cement's Profit Performance

As we discussed above, JK Lakshmi Cement has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that JK Lakshmi Cement's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 3 warning signs for JK Lakshmi Cement you should know about.

This note has only looked at a single factor that sheds light on the nature of JK Lakshmi Cement'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. 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. 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.
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