Statutory Profit Doesn't Reflect How Good Southern Petrochemical Industries' (NSE:SPIC) Earnings Are

The subdued stock price reaction suggests that Southern Petrochemical Industries Corporation Limited's (NSE:SPIC) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

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Zooming In On Southern Petrochemical Industries' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Southern Petrochemical Industries has an accrual ratio of -0.14 for the year to September 2025. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of ₹3.9b, well over the ₹1.86b it reported in profit. Given that Southern Petrochemical Industries had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₹3.9b would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Southern Petrochemical Industries.

Our Take On Southern Petrochemical Industries' Profit Performance

As we discussed above, Southern Petrochemical Industries has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Southern Petrochemical Industries' statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 74% in the last year. 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. While earnings are important, another area to consider is the balance sheet. We've done some analysis and you can see our take on Southern Petrochemical Industries' balance sheet by clicking here.

This note has only looked at a single factor that sheds light on the nature of Southern Petrochemical Industries' 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.