Shri Hare-Krishna Sponge Iron's (NSE:SHKSIL) Weak Earnings May Only Reveal A Part Of The Whole Picture

Shri Hare-Krishna Sponge Iron Limited's (NSE:SHKSIL) recent weak earnings report didn't cause a big stock movement. We think that investors are worried about some weaknesses underlying the earnings.

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Zooming In On Shri Hare-Krishna Sponge Iron's 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.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to September 2025, Shri Hare-Krishna Sponge Iron recorded an accrual ratio of 0.70. 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 ₹289m despite its profit of ₹90.6m, mentioned above. We also note that Shri Hare-Krishna Sponge Iron's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹289m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shri Hare-Krishna Sponge Iron.

Our Take On Shri Hare-Krishna Sponge Iron's Profit Performance

As we discussed above, we think Shri Hare-Krishna Sponge Iron's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Shri Hare-Krishna Sponge Iron's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Nonetheless, it's still worth noting that its earnings per share have grown at 16% over the last three years. 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. If you'd like to know more about Shri Hare-Krishna Sponge Iron as a business, it's important to be aware of any risks it's facing. When we did our research, we found 4 warning signs for Shri Hare-Krishna Sponge Iron (2 are significant!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of Shri Hare-Krishna Sponge Iron's 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.