Arihant Superstructures' (NSE:ARIHANTSUP) Weak Earnings May Only Reveal A Part Of The Whole Picture

A lackluster earnings announcement from Arihant Superstructures Limited (NSE:ARIHANTSUP) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Zooming In On Arihant Superstructures' 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). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Arihant Superstructures has an accrual ratio of 0.33 for the year to March 2025. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Over the last year it actually had negative free cash flow of ₹2.5b, in contrast to the aforementioned profit of ₹546.8m. We also note that Arihant Superstructures' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹2.5b.

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

Our Take On Arihant Superstructures' Profit Performance

As we have made quite clear, we're a bit worried that Arihant Superstructures didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Arihant Superstructures' underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 3 warning signs for Arihant Superstructures (of which 2 can't be ignored!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Arihant Superstructures' 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.