Shree Digvijay Cement's (NSE:SHREDIGCEM) Earnings Are Weaker Than They Seem

Despite posting some strong earnings, the market for Shree Digvijay Cement Company Limited's (NSE:SHREDIGCEM) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.

See our latest analysis for Shree Digvijay Cement

Examining Cashflow Against Shree Digvijay Cement'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). 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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.

Over the twelve months to March 2024, Shree Digvijay Cement recorded an accrual ratio of 0.20. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. In fact, it had free cash flow of ₹368m in the last year, which was a lot less than its statutory profit of ₹877.8m. Shree Digvijay Cement shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down over the last twelve months. One positive for Shree Digvijay Cement 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. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shree Digvijay Cement.

Our Take On Shree Digvijay Cement's Profit Performance

Shree Digvijay Cement didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Shree Digvijay Cement's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 58% per annum growth in EPS for the last three. 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 want to do dive deeper into Shree Digvijay Cement, you'd also look into what risks it is currently facing. Be aware that Shree Digvijay Cement is showing 3 warning signs in our investment analysis and 1 of those doesn't sit too well with us...

Today we've zoomed in on a single data point to better understand the nature of Shree Digvijay Cement's 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.

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