Some Investors May Be Willing To Look Past Laxmi Organic Industries' (NSE:LXCHEM) Soft Earnings

The market for Laxmi Organic Industries Limited's (NSE:LXCHEM) shares didn't move much after it posted weak earnings recently. We did some digging, and we believe the earnings are stronger than they seem.

View our latest analysis for Laxmi Organic Industries

Examining Cashflow Against Laxmi Organic Industries' 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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Laxmi Organic Industries has an accrual ratio of -0.12 for the year to March 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of ₹3.1b in the last year, which was a lot more than its statutory profit of ₹1.21b. Notably, Laxmi Organic Industries had negative free cash flow last year, so the ₹3.1b it produced this year was a welcome improvement.

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 Laxmi Organic Industries' Profit Performance

As we discussed above, Laxmi Organic Industries has perfectly satisfactory free cash flow relative to profit. Because of this, we think Laxmi Organic Industries' earnings potential is at least as good as it seems, and maybe even better! On the other hand, its EPS actually shrunk in the last twelve months. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Laxmi Organic Industries as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 1 warning sign for Laxmi Organic Industries you should know about.

Today we've zoomed in on a single data point to better understand the nature of Laxmi Organic Industries' profit. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.