Crayons Advertising's (NSE:CRAYONS) Shareholders May Want To Dig Deeper Than Statutory Profit

The stock price didn't jump after Crayons Advertising Limited (NSE:CRAYONS) posted decent earnings last week. We think that investors might be worried about some concerning underlying factors.

Check out our latest analysis for Crayons Advertising

Zooming In On Crayons Advertising's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. 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".

Over the twelve months to March 2024, Crayons Advertising recorded an accrual ratio of 0.62. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of ₹275m, in contrast to the aforementioned profit of ₹175.5m. We also note that Crayons Advertising's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹275m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Crayons Advertising.

Our Take On Crayons Advertising's Profit Performance

As we discussed above, we think Crayons Advertising's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Crayons Advertising's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For instance, we've identified 3 warning signs for Crayons Advertising (1 is a bit concerning) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Crayons Advertising'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 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.