We Think You Should Be Aware Of Some Concerning Factors In Vidhi Specialty Food Ingredients' (NSE:VIDHIING) Earnings

Vidhi Specialty Food Ingredients Limited's (NSE:VIDHIING) healthy profit numbers didn't contain any surprises for investors. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

View our latest analysis for Vidhi Specialty Food Ingredients

Examining Cashflow Against Vidhi Specialty Food Ingredients' 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. 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. The ratio shows us how much a company's profit exceeds its FCF.

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. 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".

Vidhi Specialty Food Ingredients has an accrual ratio of 0.58 for the year to September 2021. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of ₹501.4m, a look at free cash flow indicates it actually burnt through ₹579m in the last year. It's worth noting that Vidhi Specialty Food Ingredients generated positive FCF of ₹355m a year ago, so at least they've done it in the past. The good news for shareholders is that Vidhi Specialty Food Ingredients' 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 Vidhi Specialty Food Ingredients.

Our Take On Vidhi Specialty Food Ingredients' Profit Performance

As we discussed above, we think Vidhi Specialty Food Ingredients' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Vidhi Specialty Food Ingredients' underlying earnings power is lower 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. 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 Vidhi Specialty Food Ingredients at this point in time. Be aware that Vidhi Specialty Food Ingredients is showing 2 warning signs in our investment analysis and 1 of those is significant...

This note has only looked at a single factor that sheds light on the nature of Vidhi Specialty Food Ingredients' 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 that insiders are buying to be useful.

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.

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