Statutory Profit Doesn't Reflect How Good Lyka Labs' (NSE:LYKALABS) Earnings Are

When companies post strong earnings, the stock generally performs well, just like Lyka Labs Limited's (NSE:LYKALABS) stock has recently. We did some digging and found some further encouraging factors that investors will like.

Check out our latest analysis for Lyka Labs

Zooming In On Lyka Labs' 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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. 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 2021, Lyka Labs had an accrual ratio of -0.13. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of ₹633m, well over the ₹467.5m it reported in profit. Lyka Labs shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On Lyka Labs' Profit Performance

As we discussed above, Lyka Labs has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Lyka Labs' statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Lyka Labs as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 3 warning signs for Lyka Labs and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Lyka Labs' 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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