Shivalik Bimetal Controls' (NSE:SBCL) Earnings Are Weaker Than They Seem

Shivalik Bimetal Controls Limited's (NSE:SBCL) stock was strong after they reported robust earnings. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

See our latest analysis for Shivalik Bimetal Controls

A Closer Look At Shivalik Bimetal Controls' 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Shivalik Bimetal Controls has an accrual ratio of 0.34 for the year to September 2021. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Over the last year it actually had negative free cash flow of ₹111m, in contrast to the aforementioned profit of ₹437.1m. We saw that FCF was ₹177m a year ago though, so Shivalik Bimetal Controls has at least been able to generate positive FCF in the past. One positive for Shivalik Bimetal Controls shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shivalik Bimetal Controls.

Our Take On Shivalik Bimetal Controls' Profit Performance

As we discussed above, we think Shivalik Bimetal Controls' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Shivalik Bimetal Controls' underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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 Shivalik Bimetal Controls as a business, it's important to be aware of any risks it's facing. For instance, we've identified 2 warning signs for Shivalik Bimetal Controls (1 doesn't sit too well with us) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Shivalik Bimetal Controls' 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. 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.

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.

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