We Think You Should Be Aware Of Some Concerning Factors In Vinati Organics' (NSE:VINATIORGA) Earnings

By
Simply Wall St
Published
November 17, 2021
NSEI:VINATIORGA
Source: Shutterstock

Vinati Organics Limited's (NSE:VINATIORGA) robust recent earnings didn't do much to move the stock. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

See our latest analysis for Vinati Organics

earnings-and-revenue-history
NSEI:VINATIORGA Earnings and Revenue History November 18th 2021

A Closer Look At Vinati Organics' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. 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 September 2021, Vinati Organics recorded an accrual ratio of 0.24. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In the last twelve months it actually had negative free cash flow, with an outflow of ₹70m despite its profit of ₹2.97b, mentioned above. We saw that FCF was ₹1.9b a year ago though, so Vinati Organics 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 Vinati Organics.

Our Take On Vinati Organics' Profit Performance

Vinati Organics 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 Vinati Organics' true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 39% 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. While conducting our analysis, we found that Vinati Organics has 1 warning sign and it would be unwise to ignore it.

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

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