Hathway Cable and Datacom's (NSE:HATHWAY) Solid Profits Have Weak Fundamentals

Hathway Cable and Datacom Limited (NSE:HATHWAY) just reported some strong earnings, and the market reacted accordingly with a healthy uplift in the share price. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

See our latest analysis for Hathway Cable and Datacom

Examining Cashflow Against Hathway Cable and Datacom's 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2024, Hathway Cable and Datacom had an accrual ratio of 0.33. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. In the last twelve months it actually had negative free cash flow, with an outflow of ₹6.9b despite its profit of ₹1.01b, mentioned above. We saw that FCF was ₹1.6b a year ago though, so Hathway Cable and Datacom has at least been able to generate positive FCF in the past. The good news for shareholders is that Hathway Cable and Datacom'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 Hathway Cable and Datacom.

Our Take On Hathway Cable and Datacom's Profit Performance

As we have made quite clear, we're a bit worried that Hathway Cable and Datacom didn't back up the last year's profit with free cashflow. For this reason, we think that Hathway Cable and Datacom's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that, its earnings per share increased by 79% in the last year. 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. If you want to do dive deeper into Hathway Cable and Datacom, you'd also look into what risks it is currently facing. At Simply Wall St, we found 1 warning sign for Hathway Cable and Datacom and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Hathway Cable and Datacom'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.