We Think That There Are Issues Underlying Innova Captab's (NSE:INNOVACAP) Earnings

Despite posting some strong earnings, the market for Innova Captab Limited's (NSE:INNOVACAP) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

Check out our latest analysis for Innova Captab

Examining Cashflow Against Innova Captab's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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.

Innova Captab has an accrual ratio of 0.31 for the year to March 2024. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Even though it reported a profit of ₹943.5m, a look at free cash flow indicates it actually burnt through ₹1.4b in the last year. We also note that Innova Captab's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹1.4b.

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

Our Take On Innova Captab's Profit Performance

Innova Captab 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 Innova Captab's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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 while earnings quality is important, it's equally important to consider the risks facing Innova Captab at this point in time. While conducting our analysis, we found that Innova Captab has 1 warning sign and it would be unwise to ignore this.

This note has only looked at a single factor that sheds light on the nature of Innova Captab's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.