Shree Digvijay Cement's (NSE:SHREDIGCEM) Sluggish Earnings Might Be Just The Beginning Of Its Problems

The subdued market reaction suggests that Shree Digvijay Cement Company Ltd.'s (NSE:SHREDIGCEM) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.

Our analysis indicates that SHREDIGCEM is potentially undervalued!

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

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

Shree Digvijay Cement has an accrual ratio of 0.20 for the year to September 2022. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Over the last year it actually had negative free cash flow of ₹31m, in contrast to the aforementioned profit of ₹436.2m. We saw that FCF was ₹755m a year ago though, so Shree Digvijay Cement has at least been able to generate positive FCF in the past.

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. Therefore, it seems possible to us that Shree Digvijay Cement's true underlying earnings power is actually less than its statutory profit. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 4 warning signs for Shree Digvijay Cement you should be mindful of and 2 of these are concerning.

This note has only looked at a single factor that sheds light on 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. 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.

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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.