We Think That There Are Issues Underlying Kamdhenu Ventures' (NSE:KAMOPAINTS) Earnings

Despite announcing strong earnings, Kamdhenu Ventures Limited's (NSE:KAMOPAINTS) stock was sluggish. We did some digging and found some worrying underlying problems.

View our latest analysis for Kamdhenu Ventures

A Closer Look At Kamdhenu Ventures' 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. 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. 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. 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 2024, Kamdhenu Ventures recorded an accrual ratio of 0.23. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Over the last year it actually had negative free cash flow of ₹216m, in contrast to the aforementioned profit of ₹138.5m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₹216m, this year, indicates high risk. The good news for shareholders is that Kamdhenu Ventures' 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. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Kamdhenu Ventures.

Our Take On Kamdhenu Ventures' Profit Performance

Kamdhenu Ventures didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Kamdhenu Ventures' true underlying earnings power is actually less than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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. So while earnings quality is important, it's equally important to consider the risks facing Kamdhenu Ventures at this point in time. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Kamdhenu Ventures.

Today we've zoomed in on a single data point to better understand the nature of Kamdhenu Ventures' profit. But there are plenty of other ways to inform your opinion of a company. 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.

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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.