Tembo Global Industries' (NSE:TEMBO) Solid Profits Have Weak Fundamentals

Despite announcing strong earnings, Tembo Global Industries Limited's (NSE:TEMBO) stock was sluggish. Our analysis uncovered some concerning factors that we believe the market might be paying attention to.

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A Closer Look At Tembo Global Industries' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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 2025, Tembo Global Industries recorded an accrual ratio of 1.14. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of ₹2.9b despite its profit of ₹509.6m, mentioned above. We also note that Tembo Global Industries' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹2.9b.

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

Our Take On Tembo Global Industries' Profit Performance

As we have made quite clear, we're a bit worried that Tembo Global Industries didn't back up the last year's profit with free cashflow. For this reason, we think that Tembo Global Industries' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the good news is that its EPS growth over the last three years has been very impressive. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Our analysis shows 3 warning signs for Tembo Global Industries (2 make us uncomfortable!) and we strongly recommend you look at them before investing.

This note has only looked at a single factor that sheds light on the nature of Tembo Global Industries' profit. But there are plenty of other ways to inform your opinion of a company. 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.