We Think That There Are Issues Underlying TCPL Packaging's (NSE:TCPLPACK) Earnings

Despite announcing strong earnings, TCPL Packaging Limited's (NSE:TCPLPACK) stock was sluggish. We think that the market might be paying attention to some underlying factors are concerning.

View our latest analysis for TCPL Packaging

Zooming In On TCPL Packaging's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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 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.

For the year to March 2022, TCPL Packaging had an accrual ratio of 0.20. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of ₹473.5m, a look at free cash flow indicates it actually burnt through ₹924m in the last year. It's worth noting that TCPL Packaging generated positive FCF of ₹555m a year ago, so at least they've done it in the past. The good news for shareholders is that TCPL Packaging's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. 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 TCPL Packaging.

Our Take On TCPL Packaging's Profit Performance

TCPL Packaging 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 TCPL Packaging's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 64% 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. So while earnings quality is important, it's equally important to consider the risks facing TCPL Packaging at this point in time. For example, we've found that TCPL Packaging has 4 warning signs (1 is a bit unpleasant!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of TCPL Packaging's profit. But there are plenty of other ways to inform your opinion of a company. 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.