MSP Steel & Power's (NSE:MSPL) Soft Earnings Don't Show The Whole Picture

Shareholders appeared unconcerned with MSP Steel & Power Limited's (NSE:MSPL) lackluster earnings report last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for MSP Steel & Power

A Closer Look At MSP Steel & Power'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. 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.

For the year to September 2024, MSP Steel & Power had an accrual ratio of -0.11. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of ₹1.6b during the period, dwarfing its reported profit of ₹150.6m. MSP Steel & Power's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of MSP Steel & Power.

Our Take On MSP Steel & Power's Profit Performance

As we discussed above, MSP Steel & Power has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that MSP Steel & Power's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. If you'd like to know more about MSP Steel & Power as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 2 warning signs for MSP Steel & Power (of which 1 makes us a bit uncomfortable!) you should know about.

This note has only looked at a single factor that sheds light on the nature of MSP Steel & Power'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. 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.