Krishca Strapping Solutions' (NSE:KRISHCA) Problems Go Beyond Weak Profit

Despite Krishca Strapping Solutions Limited's (NSE:KRISHCA) recent earnings report having lackluster headline numbers, the market responded positively. We think that shareholders might be missing some concerning factors that our analysis found.

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Zooming In On Krishca Strapping Solutions' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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.

Over the twelve months to March 2025, Krishca Strapping Solutions recorded an accrual ratio of 0.63. 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. In the last twelve months it actually had negative free cash flow, with an outflow of ₹489m despite its profit of ₹116.0m, mentioned above. We also note that Krishca Strapping Solutions' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹489m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Krishca Strapping Solutions.

Our Take On Krishca Strapping Solutions' Profit Performance

As we have made quite clear, we're a bit worried that Krishca Strapping Solutions didn't back up the last year's profit with free cashflow. For this reason, we think that Krishca Strapping Solutions' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the good news is that its EPS growth over the last three years has been very impressive. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 4 warning signs for Krishca Strapping Solutions you should be mindful of and 1 of these can't be ignored.

This note has only looked at a single factor that sheds light on the nature of Krishca Strapping Solutions' 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.

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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.