We Think That There Are Issues Underlying Scoda Tubes' (NSE:SCODATUBES) Earnings

Scoda Tubes Limited (NSE:SCODATUBES) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

A Closer Look At Scoda Tubes' 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. The ratio shows us how much a company's profit exceeds its FCF.

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 September 2025, Scoda Tubes recorded an accrual ratio of 0.45. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of ₹1.3b despite its profit of ₹376.2m, mentioned above. We also note that Scoda Tubes' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹1.3b.

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

Our Take On Scoda Tubes' Profit Performance

As we have made quite clear, we're a bit worried that Scoda Tubes didn't back up the last year's profit with free cashflow. For this reason, we think that Scoda Tubes' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. So while earnings quality is important, it's equally important to consider the risks facing Scoda Tubes at this point in time. For example - Scoda Tubes has 1 warning sign we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Scoda Tubes' 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 with significant insider holdings to be useful.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.